Wachtell Lipton recently published the 2024 edition of its 237-page “Takeover Law and Practice” publication. It addresses recent developments in M&A activity, activism and antitrust, 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. As always, the publication is full of both high-level analysis and real-world examples.
It has this to say about the recent market for acquisition financing:
Widely held concerns about inflation, rising interest rates and a possible recession combined to slow debt financing and deal activity in the first half of 2023. Borrowers deferred new debt deals, delayed planned refinancings and paused major corporate transactions while waiting for interest rates to top out. Financial sponsors, in particular, held back on debt-financed leveraged buyouts while watching to see whether interest rates (or business valuations) would fall. Direct lending remained hot, continuing to fill in market gaps, but it was by no means a borrower’s market, whether in terms of pricing, terms or leverage multiples.
The story changed somewhat in the second half of the year. Inflation slowed and deal activity picked up. […] When the dust settled, 2023 investment-grade bond issuance stood at $1.14 trillion, highyield bond issuance stood at $169 billion, and leveraged loan issuance stood at $737 billion. With the exception of the high-yield bond figure, which was up $65 billion from the 13-year low of
2022, those figures were basically flat year-to-year (and were paltry compared to the boom year of 2021, when high-yield bond issuance exceeded $450 billion and leveraged loan issuance exceeded $800 billion).
Sustained higher interest rates have also increased pressure on already challenged businesses that incurred (too much) debt in the days of “lower for longer.” […] Despite anticipated rate cuts in 2024, “higher for longer” remains the order of the day and markets seem to be embracing this new normal. 2024 is off to a dynamic start, but careful planning and sophisticated advice on debt-related issues will remain paramount, however the environment evolves.
The March-April Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:
– Lessons From the Activision-Microsoft Merger – Delaware Chancery’s Moelis II Decision Provides Cautionary Tale for Boards and Activists – Sears and (the Limited Scope of) Controlling Stockholder Fiduciary Duties
– Delaware Chancery Reminds Us That Directors Generally May Not Share Confidential Information With Stockholders Who Nominated Them
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without 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.
A recent lawsuit involving a buyer’s attempt to terminate a deal based on a seller’s alleged non-compliance with the purchase agreement’s financing cooperation covenant raises the question of when a buyer should have the right to walk away from a deal on that basis. Here’s a description of the lawsuit from this article in Weil’s Private Equity Sponsor Sync newsletter:
In Omni Newco, LLC v. Forward Air Corporation, Forward Air entered into a definitive agreement to acquire Omni by way of merger for a combination of cash in the amount of $150 million and stock in Forward Air, the cash component of which would be financed using debt. In connection with Forward obtaining acquisition debt financing, Omni agreed to certain customary financing cooperation covenants, including providing reasonable access to Omni’s books and records, furnishing information, and using reasonable best efforts to cooperate with Forward’s financing efforts during the
interim period. While negotiating the merger agreement,
Omni sought, but did not succeed in obtaining, a provision that failure for it to comply with these obligations would only result in the closing condition regarding covenant performance not being satisfied if and to the extent that the buyer was not able to obtain its debt financing as a result of Omni’s breach. Essentially, Omni didn’t want its efforts to help the buyer obtain acquisition financing to be a potential reason Forward could refuse to close.
The parties resolved their differences on the eve of trial, but the article says that the dispute highlights the need to consider whether a financing cooperation covenant should give rise to a termination right based on covenant non-compliance only if the buyer’s financing is not obtained as a result. From a seller’s perspective, limiting the buyer’s right to walk away in this fashion enhances deal certainty, but the article cautions that a record of trying to include language addressing this directly & failing will create a potentially problematic “legislative history” in the event of litigation.
Section 546(e) of the Bankruptcy Code provides a safe harbor from constructive fraudulent transfer claims for transfers that are settlement payments or payments related to a securities contract, when those transfers are “made by or to (or for the benefit of) … financial institutions.” Most commonly, the safe harbor is asserted to provide protection against such claims to public shareholders who receive merger consideration payments through a financial institution that serves as the buyer’s paying agent, but the 7th Circuit’s recent decision in PETR v. BMO Harris Bank N.A., (7th Cir. 3/24), affirmed a district court’s ruling that the safe harbor extended to transactions involving private companies as well.
The case arose out of a target company’s repayment of bridge financing provided by BMO Harris in connection with the target’s acquisition by Sun Capital Partners VI, L.P. That repayment also relieved Sun Capital of certain guarantees that it made to the bridge lender. After the target filed bankruptcy, the trustee filed claims against BMO Harris and Sun Capital alleging that the repayment and elimination of the guarantees involved a constructive fraudulent conveyance not protected by the safe harbor.
A federal bankruptcy court ruled that the Section 546(e) safe harbor did not extend to securities transactions involving private companies. An Indiana federal district court overruled that decision, and the 7th Circuit affirmed the district court’s decision. This excerpt from King & Spalding’s memo on the case explains the Court’s reasoning:
The Seventh Circuit next determined that the plain text and definition of “securities contract” is broad and unambiguous as used in section 546(e), and the 546(e) safe harbor therefore applies to transfers made in connection with securities contracts for both publicly and privately held securities. The Courts of Appeals for the Third, Fifth, Sixth and Eighth Circuits have reached similar conclusions.
The Seventh Circuit agreed that the stock purchase agreement, which involved privately held securities, clearly fit within the definition of a securities contract. The bridge loan authorization agreement also fit within the definition as an extension of credit “for the clearance or settlement of securities transactions.” The court also found that because the guaranty was a credit enhancement for the bridge loan authorization agreement, it fit within the definition of a securities contract as a “credit enhancement related to any agreement or transaction referred to in [the definition.]” The court also noted that the three agreements were additionally covered by the catch-all language of the definition, which includes “any other agreement or transaction that is similar to an agreement or transaction referred to in [the definition].
The 7th Circuit also held that the 546(e) safe harbor preempts state law claims that seek to recover value transfers that the safe harbor is intended to protect, because a holding to the contrary would essentially render the safe harbor meaningless.
Yesterday, the FTC adopted a final rule banning most non-competes in a 3-2, party line vote. Like the proposed rule, the final version includes an exception for non-competes entered into in connection with the bona fide sale of a business. The carve-out is contained in Section 910.3(a) of the rule, and here’s the relevant language:
Bona fide sales of business. The requirements of this part 910 shall not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
Originally, the carve-out would have applied only to non-competes with a “substantial owner, substantial member or substantial partner” of the business entity. In turn, the proposal would have defined these terms to include only “an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.”
In a prior blog on the proposed rule, I observed that ownership requirement would have excluded a lot of folks that a buyer has a legitimate interest in seeking a non-compete from as part of the deal. A number of commenters who otherwise supported the proposal pointed that out to the FTC, and the agency ultimately eliminated that 25% owner limitation in the final rule, noting in the adopting release that:
The proposed requirement that an excepted non-compete bind only a “substantial” owner, member or partner of the business entity being sold was designed to allow those non-competes between the seller and the buyer of a business which are critical to effectively transfer goodwill while prohibiting those which are more likely to be exploitative and coercive due to an imbalance of bargaining power between the seller and the buyer.
However, commenters persuasively argued that the proposed 25% ownership threshold was too high because it failed to reflect the relatively low ownership interest held by many owners, members, and partners with significant goodwill in their business. The Commission declines to maintain the “substantial” interest requirement with a lower percentage threshold for the same reason.
The rule becomes effective 120 days after publication in the Federal Register, but stay tuned, because the dissenting commissioners questioned the FTC’s authority to adopt the rule and litigation challenging it is certain. We’ll be posting memos on the rule in our Antitrust Practice Area. If you’re interested in some of the broader implications of the FTC’s new rule, check out this morning’s blog from Meredith on CompensationStandards.com.
Despite a bit of a checkered reputation, non-SPAC reverse mergers are still a thing, and this excerpt from a recent WilmerHale memo (p. 14) says that there’s been an uptick in these deals and that, for some companies, they are an attractive alternative to an IPO:
The trend of declining public company valuations (including a surprising number of companies trading at values below their net cash), coupled with challenging conditions in the traditional IPO market, has led to a significant uptick in reverse mergers with publicly held life sciences companies since the beginning of 2022. These transactions have originated most frequently with pre-commercial life sciences companies that are listed on a major exchange and suffer a scientific setback or other disruption leading to a restructuring (or winding down) of operations—often while holding significant amounts of cash.
In these circumstances, the reverse merger transaction results in the public company effectively reinvesting its cash into the business of the private company, giving the public company’s legacy stockholders the opportunity to continue to hold stock in a new business while the formerly private company takes advantage of the public company’s existing cash and stock exchange listing.
The memo goes on to review considerations in establishing the exchange ratio in a reverse merger, the SEC filing and review process, as well as issues associated with a simultaneous “sign & close” structure & the SEC’s potential classification of the public company as a “shell company.”
The rise of RWI has been one of the biggest stories in private M&A over the past decade or so, but according to a recent SRS Acquiom study, RWI usage on private deals appears to be plateauing. The study says that post-closing issues may be a big reason that dealmakers have tempered their enthusiasm for RWI. This excerpt highlights some of the specific concerns for sellers in deals using RWI:
Indemnification escrows are seldom returned to the sellers on deals with an RWI claim.
— Buyers could be highly motivated to quickly burn through the RWI retention amount to unlock coverage under the policy.
— Nearly half of deals with RWI include a general indemnification escrow as security for the sellers’ portion of the RWI retention.
Sellers and the shareholder representative may not be privy to claims made under the RWI policy since buyers are often the named insured.
— Buyers may fully exhaust RWI coverage before sellers are even aware there has been a claim, at which point sellers may be on the hook again.
— RWI providers are not as familiar with the target’s operations and financials and may not be able to defend against a claim as well as the sellers and shareholder representative.
RWI can add varying levels of complexity.
— When making a large claim against the policy, buyers may employ full resources, which could dramatically outweigh the resources available to sellers to defend the much smaller indemnification escrow amount (or the risk of losing such escrow might not outweigh the cost to launch such a defense).
— Sellers may still be on the hook for indemnification claims excluded from RWI coverage or when RWI coverage is exhausted and may end up going out of pocket, especially if the deal had a smaller indemnification escrow.
It isn’t just sellers who have reason to think a little harder about using RWI in a deal. That’s because RWI’s evolution in recent years toward becoming a commodity product hasn’t been good news for buyers.
This week, the FTC announced an open meeting next Tuesday, April 23rd. The Commission is scheduled to vote on final rules — previously proposed in January 2023 — that “would generally prevent most employers from using noncompete clauses.”
The press release notes that the FTC received upwards of 26,000 comments on the proposed rules — more than the SEC’s climate disclosure rules! This Morrison Forrester alert notes that, whatever form the final rules take, they’ll likely be “promptly challenged in litigation.”
Shortly after the Inflation Reduction Act was signed into law, a number of tricky interpretive issues regarding the stock repurchase excise tax were identified, and the IRS published temporary interim guidance in Notice 2023-2. John blogged about the application of that interim guidance to SPACs in early 2023. Earlier this month, the Treasury Department and IRS jointly announced proposed regulations with new guidance on the excise tax.
This Greenberg Traurig alert notes that the regulations, if adopted as proposed, would generally follow the approach in the interim guidance, with some modifications and clarifications. The memo summarizes the application of the proposed rules to SPACs as follows:
– The Treasury Department and IRS decided it was neither necessary nor appropriate to adopt special rules for SPACs in the Proposed Regulations. Thus, SPACs are generally subject to the rules of the Proposed Regulations in the same manner as other taxpayers.
– The Proposed Regulations do not provide transition relief from the stock repurchase excise tax for payments in connection with merger and acquisition (M&A) transactions pursuant to a binding commitment entered into prior to the enactment date of the tax. Similarly, no transition relief is provided for redemptions by SPACs formed prior to the enactment date.
– The Proposed Regulations do not provide an exception for redemptions of stock subject to a mandatory redemption provision or unilateral put option, which is a type of stock commonly issued by SPACs.
– The Proposed Regulations do not expand the netting rule to apply to de-SPAC transactions in which the SPAC is not the acquiring corporation, such as “double dummy” transactions.
– SPACs generally will not be required to pay stock repurchase excise taxes in respect of 2023 repurchases until after the final regulations are published.
For a discussion of the application of the proposed regulations more broadly to other M&A/restructuring, capital markets, and compensatory transactions, see this memo from Wilson Sonsini. We’re posting related resources in our “Tax” Practice Area.
Late last week, the Treasury Department announced the issuance of a Notice of Proposed Rulemaking “to enhance certain CFIUS procedures and sharpen its penalty and enforcement authorities.” This Covington alert explains that the rulemaking “proposes revisions to CFIUS’s existing authorities in the context of non-notified transactions, mitigation agreement negotiations, and the imposition of civil monetary penalties.” While in some respects the changes would “largely codify existing practice” the alert says:
Nevertheless, the rulemaking is notable insofar as it reflects a continued evolution of CFIUS, under current leadership, toward emphasizing enforcement and monitoring compliance. This evolution marks a material departure from CFIUS’s historical emphasis, which prioritized applying the Committee’s authorities surgically to address national security risks that were not addressable through other authorities, promoting open investment, and operating at a speed so as not to disrupt M&A activity unnecessarily. Parties who interact with the Committee—in the context of transactions under review, transactions that were not filed, and compliance with mitigation conditions—would be well advised to track that continued evolution closely.
Specifically, the proposed amendments would:
(1) expand CFIUS’s authority to request (and require) information from parties, including outside the context of a transaction that is under review by the Committee;
(2) require parties who are negotiating mitigation terms with CFIUS to “substantively respond” to mitigation proposals within three business days; and
(3) expand CFIUS’s authority to issue larger civil monetary penalties in more contexts for violations of Parts 800 and 802 or mitigation agreements with CFIUS.
The alert discusses each of these proposals in detail. We’re posting resources in our “National Security Considerations” Practice Area.