I keep trying to talk myself out of blogging about Twitter because even though it’s undoubtedly the M&A case of the year, it’s also really goofy and I honestly feel a little silly writing about it. Still, against my better judgment, I will close out the week with a few highlights from the last couple of days:
– We’ve posted a copy of Twitter’s complaint in our “Litigation” Practice Area. It’s really well-done and I highly recommend that you read it if you get a chance. My guess is that Musk’s answer will also be very well done.
– There have been a lot of law professor types weighing in with their views on the case. Some of their perspectives seem pretty well thought out. Others, like this piece in The Wall Street Journal, are, as Matt Levine put it, “weird.” If you’re looking for a more substantive takedown of the WSJ piece, UCLA’s Stephen Bainbridge has a solid one for you.
– Speaking of law professors, Ann Lipton has a good post on The Business Law Prof Blog addressing how the public is about to learn that when a board decides to sell a company, it’s all about stockholders, not stakeholders. Also, check out this thread from Columbia’s Eric Talley on how settlement negotiations might play out.
– Then there’s this remarkable comment. Speaking on CNBC, former Delaware Vice Chancellor Berger said that specific performance is likely off the table because the Chancery Court would be afraid that Musk would defy its order.
In all seriousness, former VC Berger’s comment really shocked me. I think the perception that the Chancery Court would shy away from a specific performance remedy that it thought was justified because it was intimidated by Musk would be a huge blow to Delaware’s credibility and would accelerate the move of M&A litigation to federal courts, which have, among other things, the 101st Airborne potentially available to back up their orders.
CFIUS recently held its first ever conference, which included speakers from a variety of member agencies. This Holland & Knight memo says that the conference confirmed both that nature of national security concerns in foreign investment transactions is evolving and that the U.S. remains committed to an open investment environment. The memo highlights five key takeaways from the conference. This excerpt discusses one of them – the continuing expansion in CFIUS’s review of non-notified transactions:
Speakers emphasized that, since the enactment of FIRRMA, the Committee has continued to expand resources to identify and review non-notified transactions. At the same time, CFIUS officials did note that typically non-notified transactions are referred to CFIUS by other agencies. CFIUS also learns of transactions through the media, SEC filings and tips from the public.
Requests for information from CFIUS regarding non-notified transactions are not meant to be antagonistic, speakers said. As a first step, they aim to confirm whether the Committee has jurisdiction. Even though not required, parties are encouraged to provide relevant information for the CFIUS risk assessment analysis. Speakers emphasized that the majority of non-notified inquiries do not result in a request for a formal filing and that it is key to provide CFIUS with prompt responses for the benefit of the business and the Committee.
The memo points out that there is no statute of limitations for CFIUS jurisdiction over non-notified transactions and says that CFIUS officials confirmed that conducting a CFIUS analysis and risk assessment is now a de facto requirement in every foreign investment transaction.
In case you missed it, the credit markets have become pretty choppy in recent months and a lot of debt issued by private equity portfolio companies has been trading at a significant discount. That’s expected to lead some PE funds or portfolio companies to consider buying back some of that debt. This recent Davis Polk memo discusses some of the threshold issues that PE sponsors should consider before committing to that path. This excerpt addresses potential conflicts of interest:
In some cases an acquisition of portfolio company debt can raise potential conflicts of interest that a sponsor will want to consider and properly address under its fund documents or as an investor relations matter before proceeding. For instance, if the acquisition of debt is being made through a different fund than the one that holds the equity, the sponsor may face a conflict of interest by virtue of advising two funds in different parts of the company’s capital structure. In distressed scenarios, this conflict can be more acute. Resolving these conflicts may require consultation with, or approval by, each fund’s investors or limited partner advisory committee.
Other considerations identified in the memo include restrictions on buybacks contained in the relevant credit agreements or indentures, the need to navigate securities law disclosure issues associated with repurchases, potential tax implications, and whether the buyback would create issues for funds that want to maintain qualification as “venture capital operating companies.”
Judging from the comments submitted on the SEC’s SPAC proposal, it’s pretty clear that those in the M&A business aren’t exactly fans of the SEC’s proposed rule changes. This recent article from Bloomberg Law’s Preston Brewer says that one aspect of the proposal that caused particular discomfort at the annual SPAC conference relates to the SEC’s characterization of its new underwriter liability scheme for SPAC deals as a “clarification” of existing standards:
The most concerning aspect of the Commission’s proposed SPAC rules involves what the SEC describes as a clarification of rules, particularly underwriting rules. Under the clarification, enforcement for rule violations could be retrospective as well as prospective. That prospect has roiled the SPAC industry.
SPAC Conference speakers like Ellenoff are rightly unsettled by the SEC using this language because it connotes that actors should have been conforming to this interpretation all along. Since SPACs have been around since 1993, issuing clarifications of the rules governing their conduct that contradict in essential ways how the SEC has regulated SPACs for all those years feels unfair.
This interpretation also feels disingenuous. The SEC claims that proposed new Rule 140a would “clarify” that an underwriter in a SPAC IPO is also liable for most later financings—whether the underwriter participates directly or indirectly. The transaction would be treated as a distribution of securities of the surviving public entity in a de-SPAC transaction within the meaning of Section 2(a)(11) of the Securities Act.
Of course, in addition to whatever potential enforcement consequences may lurk in the SEC’s pitch that this is a “clarification” of existing requirements, such an action also could add an arrow to the quiver of the plaintiffs’ bar in their efforts to expand the already target rich environment for SPAC litigation.
As has appeared inevitable for some time, Elon Musk formally attempted to terminate his merger agreement with Twitter on Friday. Here’s the termination letter from Musk’s lawyers. There’s already been a lot of good stuff written about the legal issues at play here (See this piece from Matt Levine and this one from Case Western law prof. Anat Alon-Beck), so I’m not going to reinvent the wheel. I just have a couple of observations.
– First, overall, the reasons Musk set forth allegedly giving him grounds to terminate don’t seem very compelling. I don’t think a court is going to be very interested in interpreting the access rights granted to Musk under Section 6.4 of the merger agreement, which are intended to allow him to obtain information “for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement”, to provide an open door to conduct the kind of due diligence investigation that he should’ve conducted prior to signing the deal.
– Second, it strikes me that the one allegation that might have some legs under the right alignment of planets is this one, which challenges Twitter’s compliance with the ordinary course covenant in Section 6.1 of the agreement:
Finally, Twitter also did not comply with its obligations under Section 6.1 of the Merger Agreement to seek and obtain consent before deviating from its obligation to conduct its business in the ordinary course and “preserve substantially intact the material components of its current business organization.”
Allegedly, Twitter’s conduct in firing a couple of high-ranking employees, as well as its announcement on July 7 that it was laying off a third of its talent acquisition team, implicates the ordinary course provision. Musk’s lawyers also point out that Twitter has instituted a general hiring freeze and – demonstrating that Musk’s side of the table isn’t lacking in chutzpah – contend that recent post-Musk deal resignations also resulted in a material breach of this covenant.
I think that what makes the final allegation a little more interesting than the first is that it could potentially give a court pause about whether Twitter acted reasonably, given its obligations under the ordinary course covenant, in taking some of these actions with respect to senior employees without seeking Musk’s consent. It still seems like a stretch to me, but allegations of breaches of the ordinary course covenant in the AB Stable case are what got traction in the Delaware courts,
Do I think this argument based on non-compliance with the ordinary course covenant is a winner? Nope. Twitter will undoubtedly point out that Musk has done nothing but sow chaos and play fast and loose with some of his own obligations under the merger agreement nearly since the day he signed it. Frankly, I don’t think that kind of conduct is going to make the Chancery Court terribly sympathetic to arguments based on an alleged covenant foot fault by Twitter.
What’s more interesting to me is, if this does end up with the Chancery Court issuing a ruling holding that Musk isn’t entitled to terminate, what kind of remedy might it fashion? There’s at least the chance that, having sown the wind, Elon Musk just might reap the whirlwind.
M&A activity declined sharply in the first half of 2022, but a new Datasite report says that dealmakers expect an uptick during the second half of this year and the first half of 2023. Here’s an excerpt from the press release summarizing some of the findings:
The majority (68%) of the more than 540 global dealmakers surveyed said they expect global deal volume to rise in the next 12 months, with most (41%) expecting to see the biggest increase in transformational acquisitions or mergers, followed by debt financing (37%) and secondary buyouts (34%). Additionally, most dealmakers (78%) are pricing at least a 5-7% increase in inflation, if not higher, into their financial valuation models for the rest of the year.
When it comes to how inflation will affect deal flow, 46% of those surveyed said they expect an increase in “hard asset” M&A, such as real estate deals, and that same percentage expect to see a greater ratio of equity to debt. 34% of respondents say inflation will result in an increase in cash deals, while only 20% expect that it will result in a decline in deal activity. Based on the survey, it appears that the biggest cloud over M&A in the second half of the year is the ongoing war in Ukraine – 36% of respondents say that the war will be the biggest reason that deals don’t go forward.
In many cases in which the meaning of an “efforts clause” governing the buyer’s conduct with respect to the achievement of earnout payment milestones has been an issue, the Chancery Court has had contractual language defining the standard to work with. But agreements don’t always define what “best efforts”, “commercially reasonable efforts” or alternative terms mean. How should efforts clauses in those situations be assessed?
That’s one of the issues the Chancery Court recently addressed in Menn v. ConMed, (Del. Ch.; 6/22), which arose out of a dispute over a buyer’s compliance with the terms of an earnout. Among other things, the sellers alleged that the buyer failed to comply with a contractual obligation to use “commercial best efforts” to develop and commercialize a surgical tool. The agreement didn’t define what “commercial best efforts” meant, so Chancellor McCormick looked to Delaware precedent. As this excerpt notes, in the absence of a definition, Delaware courts tend to view all formulations of efforts clauses as imposing similar obligations:
Deal practitioners who draft efforts clauses “have a general sense of [the] hierarchy” of such clauses. One commonly cited version of this hierarchy places “best efforts” as the highest standard with “reasonable best efforts,” “reasonable efforts,” “commercially reasonable efforts,” and “good faith efforts” following in descending order. “Commercially best efforts” provisions are not found on the standard hierarchy. Logically, such provisions would fall between “best efforts” and “commercially reasonable efforts.”
Although deal practitioners have some sense of the hierarchy among efforts clauses, courts applying the standards have struggled to discern daylight between them. This court, for example, has interpreted “best efforts” obligations as on par with “commercially reasonable efforts.” Because this court has consistently interpreted “best efforts” obligations as on par with “commercially reasonable efforts,” it follows that there is even less daylight between “best efforts” and “commercially best efforts” provisions. Indeed, the parties make no distinction in briefing. This decision, therefore, interprets “commercially best efforts” as imparting the same meaning as “best efforts.”
The Chancellor went on to note that Delaware has generally interpreted “best efforts” to require “a party to do essentially everything in its power to fulfill its obligations. . . ” In assessing breach claims based on an efforts clause, the Chancery Court has looked to whether the buyer had reasonable grounds to take the action it did and sought to address problems with its counterparty.’”
She observed that in cases arising out of merger agreements, the Court found efforts clauses were breached “where a party failed to work with its counterpart to jointly solve problems, failed to keep the deal on track, or submitted false data to and refused to cooperate with regulators.” In other settings, the Court found that a buyer breached an efforts clause “when utilizing a sales force that was too small to achieve the revenue target, expending energy and resources on stimulating an alternative to the deal, or making no effort to sell or market the product.”
Chancellor McCormick found that none of those scenarios applied to this case, and that the buyer established that its efforts to develop and market the device complied with its contractual obligations, even though it ultimately decided to abandon those efforts.
Our new Deal Lawyers Download podcast features my interview with SRS Acquiom’s Chris Letang & Kip Wallen about the company’s most recent annual M&A Private Target Deal Terms Study. Topics addressed in this 17-minute podcast include:
– Methodology and notable trends identified in the study
– Changes in the prevalence and terms of earnouts
– The growth of “no survival” provisions in private company deals
– Developments in management carveouts
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
Last week, The Activist Investor’s Michael Levin hosted a free 1-hour webinar on the SEC’s new universal proxy rules & a free replay of the program is available on Michael’s UniversalProxyCard.com site. I attended the program and thought it was very well done and insightful. In addition to Michael, the panelists were law prof. Scott Hirst of Boston University and business prof. Slava Fos of Boston College.
The webinar covered the fundamentals of the universal proxy rules, their practical implications for proxy contests, potential strategies under the new regime and critical decisions that activists and companies need to make. While the panelists generally have a pro-activist perspective, their presentation was balanced and has a lot to offer those on the corporate side as well.
The compliance date for the universal proxy rules is just around the corner – the rules apply to elections held after August 31, 2022 – but in reality, the compliance date is even closer than that. Since the rules apply to elections held after that date and not proxies filed after that date, the first batch of proxies prepared with the new rules in mind may be filed within the next few weeks!
It’s not an understatement to say that the rules represent a seismic shift in the regulatory landscape and in the way proxy contests are going to unfold going forward. DealLawyers.com members should be sure to check out our “Universal Proxy: Preparing for the New Regime” and “Activist Profiles & Playbooks” webcasts from earlier this year, as well as the other resources in our “Proxy Fights” Practice Area. Also, stay tuned for additional members-only content in the upcoming weeks that will help you prepare to hit the ground running.
You don’t want to be caught flat-footed with changes this big looming! So, if you aren’t already a member of DealLawyers.com, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.