Datasite recently published a survey of more than 500 global dealmakers on how generative AI is impacting the M&A process. In our latest Deal Lawyers Download Podcast, Doug Cullen, Datasite’s Chief Product & Strategy Officer, joined me to discuss the survey. Doug addressed the following topics addressed in this 13-minute podcast:
– Overview of survey’s scope and methodology
– Current role of AI in M&A transaction process
– Most significant potential benefits and obstacles to incorporating AI into deal processes
– Survey respondents’ assessment of the biggest upsides to using AI in M&A deals
– Survey respondents’ major concerns about the implications of AI
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re 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.
According to this S&P Global report, despite the increasing challenges buyers face in obtaining financing and the other macro headwinds facing dealmakers, Q3 deal terminations reached their lowest level since 2020. Here are some of the key takeaways from the report:
– Only two private equity-backed deals terminated in Q3 2023. That’s down from 14 reported in Q2 and represents the lowest number of quarterly deal terminations in the past three years.
– The value of the two busted private equity deals was less than $1 million. In Q3 2022, a total of $26.4 billion(!) in PE-backed deals were terminated.
– Q3 also showed an 85% year-on-year decline in all terminated M&A transactions. Only 31 deals were terminated during the quarter, and that’s the lowest quarterly count since at least 2020.
– Overall, the value of deals terminated in Q3 2023 was $12.9 billion. That’s a 78% decline from the $58.4 billion reported in the same quarter of 2022.
Last week, John blogged about the DOJ’s new “Mergers & Acquisitions Safe Harbor Policy” intended to incentivize voluntary self-disclosure of wrongdoing uncovered during the M&A process, which Deputy AGs had previewed in a speech and multiple prior comments. This Wilson Sonsini alert describes how acquirers can apply the policy and gives five practical suggestions:
1. Compliance Diligence Is Critical for M&A Transactions: Deputy AG Monaco made clear that the DOJ expects an acquiring company’s legal and compliance team to “have a prominent seat at the deal table.” Companies must involve outside counsel and legal and compliance personnel to conduct pre-acquisition diligence on target companies.
2. Pre-Acquisition Due Diligence Enhancements: Acquirers should review or adopt a mergers and acquisitions policy with accompanying procedures that help identify and mitigate compliance risks early in the deal process. Acquirers that do not perform effective due diligence or self-disclose misconduct may be exposed to successor liability.
3. Ensure Prompt Post-Closing Remediation: Six months is not a lot of time for an acquirer to identify misconduct, investigate it, and decide whether to self-disclose. Twelve months is not a lot of time to conduct a root cause analysis, integrate the target entity into the acquirer’s compliance program, and implement full remediation. Companies must be thinking ahead to this post-closing clock, even with the DOJ’s offers of flexibility.
4. Consider Increasing Pre-Acquisition Timing: Since the Safe Harbor Policy’s clock begins running on the date of closing, firms should consider proactively expanding the amount of time allotted for investigating and developing compliance measures to ensure timely disclosure. Because this is a DOJ-wide policy, all federal criminal violations are on the table.
5. Deciding Whether (and When) to Self-Report: If the acquiring company is unsure whether the target company’s previous conduct is illegal, it has to weigh the risks of self-reporting. If the company does not self-report and solves the problem internally, the DOJ could learn about the misconduct another way, and the company would not get credit under the Safe Harbor Policy. On the other hand, if the company self-reports, the DOJ could find that it did not meet the Safe Harbor Policy’s requirements, expand its investigation into other areas, or even alert other U.S. or foreign government agencies of the misconduct. This analysis is highly fact- and circumstance-specific.
– Overview of the methodology and scope of Seyfarth’s middle market M&A survey
– Trends in the use of representation and warranty insurance and major differences in deal terms when R&W insurance is or is not utilized
– The evolution of fraud exceptions & definitions and recent related statistics & trends
– Near-term expectations for deal activity and deal terms
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com or John at john@thecorporatecounsel.net.
In August 2021, in a series of blogs, John addressed the Pershing Square Tontine Holdings lawsuit alleging that PSTH is an unregistered investment company, the joint statement from 49 law firms challenging that assertion, and Bill Ackman’s announcement of his plans to dissolve PSTH. As John shared, the decision to dissolve hinged on the SEC’s approval of an offering by a new entity that is a variation on the usual SPAC playbook called a SPARC — special purpose acquisition rights company. Well, on September 29, Pershing Square SPARC Holdings announced that the SEC declared its registration statement effective and filed this 8-K.
The prospectus notes on the cover: “Our company is not a SPAC and we are not raising capital from public investors at this time” and “SPARs are a novel security with unique and important features.” The press release touts some unique benefits of the SPARC, as does Bill Ackman’s letter in the prospectus, which claims “SPARC builds upon the favorable investor-friendly features and superior investment alignment of PSTH compared with other SPACs with a number of material value-creating improvements.”
The press release and letter are worth a read. Here’s an excerpt:
By distributing SPARs for free to former PSTH stockholders and warrant holders, SPAR holders will not be required to invest capital until SPARC has: (1) identified a target; (2) completed its due diligence; (3) negotiated a transaction; (4) signed a definitive agreement; (5) received the required board votes and stockholder approval (provided by our Sponsor and sole stockholder); and (6) satisfied substantially all closing conditions that can be satisfied in advance, including regulatory approvals. Our structure eliminates the opportunity cost of capital for SPAR holders while we seek to identify and consummate a transaction.
For a quick primer on SPARCs — especially how they deviate from the traditional SPAC — check out this Wilson Sonsini alert, which concludes with these initial takeaways:
Although the SPARC structure appears to solve many issues for investors in SPAC IPOs, it is a novel and unique structure, so the investment community will need time to fully digest its benefits and drawbacks, which will likely depend on the success of the Pershing Square SPARC. Furthermore, the terms of the Pershing Square SPARC may differ materially from future SPARCs. The time required for potential market acceptance and the establishment of standard market terms will likely be extended due to the precipitous drop in investor interest in traditional SPACs and the uncertainty regarding the timing and scope of the final SEC rules for SPACs, including how those rules may apply to the SPARC structure.
Additionally, while the Pershing Square SPARC structure provides some assurances as to the minimum amount of post-closing cash, many of the issues that target companies face when considering a business combination with a traditional SPAC will continue to be issues when considering a combination with a SPARC. Those issues include limited certainty on the amount of post-closing cash, competing interests in setting the target’s pre-combination valuation, potential dilution from the sponsor warrants, uncertainty as to the timing and likelihood of closing the business combination from other closing conditions (e.g., the scope and duration of SEC review), limited post-closing public float prior to the target company’s lock-up expiring and onerous postclosing disclosure requirements.
I’m convinced non-law/finance/M&A folks already think we speak in gobbledygook, and “SPARC” isn’t doing us any favors. But so it goes, I guess.
Earlier this month, the SEC announced the adoption of final rules amending Regulation 13D-G. Here’s the 295-page adopting release, and here’s the 2-page fact sheet. Considering that the SEC had initially proposed a five calendar day deadline for Schedule 13D filings, this Diligent blog from Rebecca Sherratt notes that activist investors are breathing a collective sigh of relief since the final amendments give investors a little more leeway than as proposed. Although, Rebecca notes, “the jury is still out as to whether the rule amendments have the potential to shake up how activist investors build their stakes and kickstart their campaigns.”
We’ve shared some details on the final rule release on TheCorporateCounsel.net Blog. Below, I’m sharing our blog on the revised deadlines, but also check out our blog on the amendments & guidance related to derivatives and group formation.
Per the fact sheet, the amendments primarily:
– Shorten the deadlines for initial and amended Schedule 13D and 13G filings;
– Clarify the Schedule 13D disclosure requirements with respect to derivative securities; and
– Require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.
Here’s more on the new filing deadlines, which differ a bit from the proposed form:
For Schedule 13D, the amendments shorten the initial filing deadline from 10 days to five business days and require that amendments be filed within two business days.
For certain Schedule 13G filers (i.e., qualified institutional investors and exempt investors), the amendments shorten the initial filing deadline from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter in which the investor beneficially owns more than 5 percent of the covered class.
For other Schedule 13G filers (i.e., passive investors), the amendments shorten the initial filing deadline from 10 days to five business days. In addition, for all Schedule 13G filers, the amendments generally require that an amendment be filed 45 days after the calendar quarter in which a material change occurred rather than 45 days after the calendar year in which any change occurred.
Finally, the amendments accelerate the Schedule 13G amendment obligations for qualified institutional investors and passive investors when their beneficial ownership exceeds 10 percent or increases or decreases by 5 percent.
To ease filers’ administrative burdens associated with these shortened deadlines, the amendments extend the filing “cut-off” times in Regulation S-T for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern time.
As usual, the amendments will be effective 90 days after publication in the Federal Register, but reporting persons aren’t required to comply with the structured data requirements until December 18, 2024 (with voluntary compliance permitted beginning December 18, 2023) or the revised 13G deadlines (not 13D deadlines!) until September 30, 2024. As an example, the adopting release states “a Schedule 13G filer will be required to file an amendment within 45 days after September 30, 2024 if, as of end of the day on that date, there were any material changes in the information the filer previously reported on Schedule 13G.” Check out our “Schedules 13D & 13G” Practice Area where we’ll post memos for more info.
If you’re wondering why we didn’t give a heads-up that this was on an upcoming open meeting agenda, that’s because it wasn’t. Here’s a blog from Broc from almost 10 years ago about the SEC’s ability to adopt rules by seriatim.
The September-October issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– The Importance of Future-Proofing the Board
– M&A Buyers Beware: Trend in Delaware Merits Heightened Attention by Acquirors
– HControl Holdings: In Delaware, “A Deal’s a Deal”
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
Keith Bishop recently blogged about a new California statute that will require prospective buyers of the stock or assets of grocery or drug stores to provide advance notice to the California AG. This excerpt from the Legislative Counsel’s Digest’s summary of the legislation provides an overview of its requirements:
This bill would prohibit a person from acquiring any voting securities or assets of a retail grocery firm or retail drug firm, as those terms are defined, unless both parties give, or in the case of a tender offer, the acquiring party gives, specified notice to the Attorney General no less than 180 days before the acquisition is made effective.
The bill would require an acquiring party who is required to file notice pursuant to the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 to submit the form and documentary material required to be submitted under that federal act, and would specify information to be included in the notice for a party who is not required to file notice pursuant to that federal act, including information required to assess the competitive effects of the proposed acquisition and to assess the economic and community impact of any planned divestiture or store closures.
The statute gives the AG 180 days to evaluate a particular transaction. In addition to the availability of injunctive relief and other equitable remedies, the legislation entitles the AG to recover to recover attorney’s fees and costs and impose civil penalties of up to $20,000 for each day of noncompliance with its requirements.
Keith’s blog notes that, among its other odd provisions, the statute on its face applies to all acquisitions of grocery store assets, without an exclusion for ordinary course retail transactions, and also doesn’t require any California nexus. The statute does give the AG the authority to adopt implementing regulations, so hopefully those will sort some of this out.
Earlier this month, I blogged about comments made by Principal Deputy AG Marshall Miller on the relevance of the DOJ’s voluntary self-disclosure policy for companies engaged in M&A transactions. During the course of those comments, Deputy AG Miller promised further guidance on this topic in the near future. He was a man of his word, because just a day after my blog, Deputy AG Lisa Monaco announced the initiation of a “Mergers & Acquisitions Safe Harbor Policy” intended to incentive voluntary self-disclosure of wrongdoing uncovered during the M&A process. This excerpt from Cozen O’Connor’s recent memo on the announcement provides an overview of the new policy:
In her speech at the Society of Corporate Compliance and Ethics’ 22nd Annual Compliance & Ethics Institute, DAG Monaco touted the new policy as a way to “incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process.” To obtain a presumption of a declination, the acquiring company must disclose the misconduct discovered at the acquired company within six months from the date of closing, whether the misconduct was discovered pre- or post-acquisition. The acquiring company must also fully remediate the misconduct within one year of the date of closing. DAG Monaco acknowledged that no transaction is the same, noting that these deadlines can be extended by prosecutors, subject to a reasonableness standard.
DAG Monaco also explained that aggravating factors (e.g., executive involvement, significant profit, egregiousness of the misconduct) will be treated differently in the context of mergers and acquisitions. Where aggravating factors are present at the acquired company, they will not affect the acquiring company’s ability to receive a declination. On the other hand, where aggravating factors are not present at the acquired company, the acquired company itself can also qualify for voluntary self-disclosure benefits, including a possible declination.
Finally, any misconduct disclosed under the policy will not be a factor in any future recidivism analysis for the acquiring company.
The memo notes that DAG Monaco was very clear about the bottom line of the DOJ’s new policy: “Good companies — those that invest in strong compliance programs — will not be penalized for lawfully acquiring companies when they do their due diligence and discover and self-disclose misconduct.” It says that this new, concrete policy puts companies in “entirely new territory” and provides them with guidance and predictability that had previously been lacking. We’re posting memos on the DOJ’s new safe harbor policy in our “Due Diligence” Practice Area.
In recent years, achieving synergies associated with a target’s ESG strengths to enhance the combined company’s revenues and profitability has become an increasingly important part of many M&A transactions. This Boston Consulting Group memo provides some insights into best practices for achieving ESG-related synergies. This excerpt discusses the need to move quickly to capitalize on synergy opportunities as soon as the deal closes:
After the deal closes, start implementing ESG synergies right away. To obtain comprehensive data about the acquired company, engage in open-book discussions, town hall meetings, or small group sessions. Use this detailed information to validate targets and plans developed in earlier phases, execute risk management and savings initiatives, and, if necessary, reprioritize longer-term opportunities.
The execution phase is also the time to fine-tune the new or renewed ESG priorities and ambitions for the combined entity, as well as to define a roadmap for capturing the value. Finally, create a culture of collaboration among teams from acquirer and acquiree so that they can pursue shared goals aimed at enhancing the combined entity’s ESG performance and unlocking further value.
The memo also discusses the nature of both quantifiable and non-quantifiable ESG-related synergies. It points out that those synergies go beyond risk mitigation and encompass the ways in which an acquirer can generate value for the combined entity by utilizing its own ESG practices and those of the target, as well as by implementing new operating models and generating scale effects.