Activision Blizzard recently filed the merger agreement for Microsoft’s proposed $70 billion acquisition that the two companies announced earlier this week. Since Activision is the current poster child for workplace harassment issues & because the deal was announced on the same day that antitrust regulators promised to revamp their merger guidelines to tighten the screws on mega deals, I thought it might be interesting to poke around the agreement to see how it addressed these issues.
If Activision Blizzard were a private company, you might expect detailed reps, covenants, closing conditions & maybe even special indemnification terms to address the risks associated with the company’s high-profile workplace harassment legal problems. But it’s a public company – and public company deals are different. Here’s the relevant rep, which is included in Section 3.19 of the merger agreement:
No Allegations of Sexual Harassment, Sexual Misconduct or Retaliation. To the Knowledge of the Company, the Company and each of its Subsidiaries have not been party to a material settlement agreement entered into since January 1, 2018 with a current or former officer or employee resolving material allegations of sexual harassment, sexual misconduct or retaliation for making a claim of sexual harassment or sexual misconduct, in each case, that was alleged to have occurred on or after January 1, 2018 in the United States, by either a current (i) officer of the Company or any of its Subsidiaries; or (ii) employee of the Company or any of its Subsidiaries holding a position at or above the level of Senior Vice President. There are no, and since January 1, 2018, there have not been any, material allegations of sexual harassment, sexual misconduct or retaliation for making a claim of sexual harassment or sexual misconduct, in each case, that was alleged to have occurred on or after January 1, 2018 in the United States, by or against any current director, officer or employee holding a position at or above the level of Senior Vice President, in each case, of the Company or any of its Subsidiaries.
This is a subsection of a broader labor & employment matters rep, and as is typical in a public company deal, the rep is qualified by any disclosures made in Activision’s SEC filings & in the agreement’s disclosure schedules. There’s also a customary bring-down condition to closing in Section 7.2(a) that requires the reps made in the agreement to be true and correct at closing, “except for such failures to be true and correct that would not have or reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.”
So, assuming Activision has come clean on all of those issues, then unless there’s a development that makes the rep false and has a MAE on Activision, the risk associated with that particular hot mess falls squarely into Microsoft’s lap. That means that Microsoft has essentially priced that risk into its valuation of Activision, which is usually how it works in public company deals.
Antitrust issues are addressed in a mutual covenant on regulatory approvals set forth in Section 6.2 of the agreement. Some deals facing challenging antitrust issues include “hell or high water” language that essentially compels the buyer to take whatever actions the FTC or DOJ insists on to clear their deal. This isn’t one of those deals. Paragraph (a) of the covenant obligates the parties to use their “reasonable best efforts” to take “all actions necessary” to obtain required clearances, but paragraph (b) makes it clear that there are significant limits to what Microsoft will be obligated to do:
Regulatory Remedies. In furtherance and not in limitation of the foregoing, if and to the extent necessary to obtain clearance of the Merger pursuant to the HSR Act and any other Antitrust Laws or Foreign Investment Laws set forth in Section 7.1(b) and Section 7.1(c) of the Company Disclosure Letter, each of Parent and Merger Sub (and their respective Affiliates) will and, solely to the extent requested by Parent, the Company and its Affiliates will: (i) offer, negotiate, commit to and effect, by consent decree, hold separate order or otherwise, (A) the sale, divestiture, license or other disposition of assets (whether tangible or intangible), rights, products or businesses of the Company and its Subsidiaries; and (B) any other restrictions on the activities of the Company and its Subsidiaries; and (ii) contest, defend and appeal any Legal Proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the Merger. Notwithstanding the foregoing, Parent will not be required, either pursuant to this Section 6.2(b) or otherwise, to offer, negotiate, commit to, effect or otherwise take any action would reasonably be expected to (i) have a material adverse impact on the Company and its Subsidiaries, taken as a whole, (ii) have a material impact on the benefits expected to be derived from the Merger by Parent or (iii) have a more than immaterial impact on any business or product line of Parent (any of clauses (i), (ii) or (iii), a “Burdensome Condition”).
That “Burdensome Condition” carve makes this covenant pretty far from being a hell or high-water clause. On the other hand, Microsoft has billions of reasons to try to obtain antitrust clearance. That’s because under Section 8.3(c) of the merger agreement, if the deal is terminated because of an antitrust injunction or the failure to obtain required antitrust clearances by the drop-dead date, then Microsoft could be obligated to pay a reverse termination fee to Activision that starts at $2 billion and ratchets up to a maximum of $3 billion depending on when the deal is terminated.
By the way, the parties pretty clearly understand that they may be in for a long battle when it comes to antitrust clearance. That’s because the agreement includes a mechanism for extending the drop-dead date by up to six months past its original January 18, 2023 date in order to satisfy antitrust regulatory approval requirements.
Many private company acquisition agreements exclude consequential damages from the scope of the coverage provided under the agreement’s indemnification provisions. This recent blog from Weil’s Glenn West takes a look at that practice, which he contends arises out of a myth concerning the type of losses encompassed by these terms.
Specifically, Glenn says that the myth is that consequential damages are “somehow damages beyond the actual, compensatory damages incurred by the buyer as a result of the breach, and instead somehow covered damages that were remote or speculative.” This excerpt says that’s not the case:
The fact, however, is that remote or speculative damages are not recoverable as damages for breach of contract as a matter of traditional common law principles. Indeed, all damages awarded for breach of contract are, in most cases, required to be reasonably certain and foreseeable. And historically, the only difference between general damages and consequential damages was the fact that general damages were deemed foreseeable because they were the normal consequence of a breach of any similar contract with any counterparty, whereas consequential damages only arose because of the special circumstances of a particular counterparty (like the fact that the counterparty entered into a contract with a third party that was dependent upon performance of the primary contract).
As a result, consequential damages (also known as special damages) required enhanced foreseeability and the need to actually communicate those special circumstances to the breaching party at the time of contracting in order to hold the breaching responsible for such special or consequential damages.
The blog argues that excluding consequential damages can end up depriving the buyer of the right to be compensated for “real, actual and foreseeable damages.” It also claims that this risk is magnified by the fact that not all courts embrace the traditional understanding of consequential damages, with some courts taking the position that it has no established meaning. That means that a court’s idiosyncratic interpretation of the term might result in the buyer waiving rights to damages that it did not intend to waive.
Yesterday, the DOJ & FTC announced that in order to address “mounting concerns” about the impact of mergers on competition, they are “soliciting public input on ways to modernize federal merger guidelines to better detect and prevent illegal, anticompetitive deals in today’s modern markets.” This Cleary Gottlieb’s memo addresses comments from FTC Chair Lina Kahn & Assistant AG Jonathan Kanter during a joint press conference announcing the initiative. Here are some of the highlights from their remarks, which suggest that some big changes may be in store:
– The new guidelines may combine horizontal and vertical merger analysis into a single set of guidelines. Notably, while the DOJ is not yet withdrawing from the Vertical Merger Guidelines, AAG Kanter expressed skepticism about those Guidelines and suggested that they may receive limited weight in internal review and may not reflect how DOJ litigates cases with vertical issues.
– Areas of particular interest included multiple references to labor markets, labor issues, and the effect of mergers on labor, as well as to monopsony power more broadly.
– Chair Khan also specifically referenced “private equity roll-ups” as an area for assessment during the review process.
– AAG Kanter called out the section of the Clayton Act that refers to mergers that “tend to create a monopoly” as an area for potential development. Some discussion suggested that this might involve some sort of assessment of whether sheer company size, separate and apart from market power, might be considered for a role in the guidelines.
Kahn & Kanter also emphasized that potential harms from a merger will be evaluated in a “broad and holistic way, including looking beyond impact on end consumers.” Public comments are due by March 21, 2022, and the agencies seem to be on a fast track. According to the Cleary memo, Chair Kahn & AAG Kanter both expressed a desire to have new Merger Guidelines in place before year end.
The January – February issue of the Deal Lawyers newsletter was just posted and sent to the printer. Articles include:
– Delaware Supreme Court Upholds Advance Waiver of Statutory Appraisal Rights
– SPACs and the Implications for D&O Insurance
– Purchase Price Adjustments in Technology Deals
Remember that, as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers newsletter, we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers newsletter, anyone who has access to DealLawyers.com will be able to gain access to the newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers newsletter including how to access the issues online.
This Intralinks article by national security consultant John Lash of Darkhorse Global addresses a topic that I haven’t seen much written about – the potential need to deal with CFIUS in de-SPAC transactions. Lash acknowledges that CFIUS risks seem counterintuitive since going public is usually seen as a way to mitigate against national security risks. However, he points out that if the original U.S. target has received prior foreign investments that weren’t cleared by CFIUS, or if SPAC sponsors are foreign persons, the deal may be subject to CFIUS’s jurisdiction.
The article also contains three specific recommendations for dealing with CFIUS in a de-SPAC transaction:
– Proactive Mitigation: Sponsors and targets want the deal to close for various reasons, so evaluate early whether there may be risk in the cap table from early-stage investment and then consider how to address it through various mitigation tools, such as look-back analysis of access to non-public technical information or other intellectual property, security plans/policies, cyber and data security standards, governance structure/security officer and vendor risk, management/approval process and dilution (or accelerated dilution) conditions.
– Make the Case for Control: Identify how timely resolution of the CFIUS filing will function to reduce the national security risk as it will effectively dilute both equity ownership and voting control of the potential investors of concern. There are additional options to further address these issues such as trustees, independent directors, or accelerated dilution conditions post-closing.
– Make the Business Case: Advocate that permitting the proposed SPAC transaction better protects the national security of the U.S. by comparison to other options presently available and those potential delays could have significantly damaging consequences to the target (and conversely national security) — as many of these high-tech companies are pre-revenue and need investment capital due to burn rates.
Last month, I blogged about Vice Chancellor Will’s decision in Swift v. Houston Wire & Cable, (Del. Ch; 12/21), which touched on the issue of when, under the terms of a merger agreement, a former target stockholder is no longer a “stockholder” for purposes of asserting a books & records claim. Now, in Brown v. Matterport, (Del. Ch.; 1/22), she has addressed the issue of when a former shareholder of the target in a merger becomes a “stockholder” of the surviving entity. This Jim Hamilton blog sets forth the factual background of the case:
William J. Brown was the CEO of Matterport Operating, LLC (Legacy Matterport), a privately held spatial data company, from November 2013 to December 2018. Brown received equity compensation in the form of stock options granting him the right to purchase 1,350,000 shares of Legacy Matterport. He also purchased 37,000 restricted shares in 2014. Brown exercised all his options on October 6, 2020.
In February 2021, Legacy Matterport agreed to a business combination with Gores Holding VI, Inc., a SPAC. In the proposed de-SPAC merger, Gores would be the surviving entity and would be renamed Matterport, and Legacy Matterport would become a wholly owned subsidiary of Matterport. In July 2021, Gores adopted bylaws in anticipation of the business combination, which imposed transfer restrictions on certain shares of Matterport Class A common stock, referred to as “Lockup Shares.” The transaction was completed and the bylaws became effective.
Brown filed a complaint contending that the share trading restrictions were adopted without his consent in violation of Section 202(b) of the Delaware General Corporation Law. He sought a declaration that the lockup shares provision was unenforceable as to his shares and that he could freely transfer his shares and/or conduct derivative trading without restriction. Brown also brought fiduciary claims against Legacy Matterport’s former directors. The court bifurcated the claims and held an expedited trial on the limited issue of whether Brown was bound by the transfer restrictions.
Vice Chancellor Will held that the plaintiff wasn’t bound by the transfer restrictions. She noted that the bylaw’s language said that the restrictions applied to shares “held by the Lockup Holders immediately following the closing of the Business Combination Transaction.” The Vice Chancellor cited the language of Section 3.04 of the merger agreement, which provided that “[u]ntil surrendered . . . each share of [target stock] shall be deemed, from and after the Effective Time, to represent only the right to receive, upon such surrender, the Per Share Company Common Stock Consideration.”
Vice Chancellor Will went on to observe that the plaintiff did not complete the required paperwork and receive his shares until more than 100 after the closing. As a result, she held that under the terms of the merger agreement, the plaintiff was not a shareholder of the target “immediately following” the closing, and that the bylaw restriction didn’t apply to him.
It’s important to keep in mind that the case addressed the application of a de-SPAC post-closing lockup akin to one found in a traditional IPO. When you do that, it becomes apparent that the Vice Chancellor’s opinion creates a practical problem that transaction planners are going to need to figure out a way to draft around. Ann Lipton summarized that problem on her Twitter feed:
So, under Will’s reading of the bylaw, whether the lockup applied or did not depended on the s’holder’s voluntary decision to submit their letter quickly or slowly – those that did so quickly were subject to the lockup, those that did so slowly were … not. That’s kind of nuts. It’s a 180-day lockup, but the theory is that you can shave 80 days off that by dragging your feet in requesting the transfer, and the choice is entirely up to the s’holder. Would you like a 100-day lockup or a 180-day lockup? The choice is yours, depending on when you submit your letter.
Fortunately, in footnote 28 to her opinion, Vice Chancellor Will serves up a potential drafting solution to the problem the opinion creates:
Language in the bylaws of certain other post-de-SPAC corporations clearly restricts all shares issued to the targets’ stockholders. See the bylaws of 23andMe Holding Co., for example: “‘Lockup Shares’ means the shares of common stock received by the stockholders of the Corporation after the date of the adoption of these Bylaws as consideration in the [de-SPAC transaction].”
During the pandemic, most M&A activism has focused on opposing a pending deal or improving its terms, rather than pushing boards to seek a potential sale. This excerpt from this recent Insightia blog says there are signs that activists may shift gears in the upcoming year:
M&A activity sprinted through the fourth quarter and the turn of the year, with activist investors more determined than ever to capitalize. Based on recent reporting, event-driven activist Jana Partners – a semi-reliable barometer of hedge funds’ confidence in dealmaking – could pressure as many as seven companies to sell themselves or parts of themselves in the coming months.
A pro-M&A tilt from activists would signal progress from pandemic-era activism, which has been much more focused on stopping or improving deals that have been struck at low valuations. Yet throughout the past two years, there have been companies pushed into strategic reviews thanks to more sophisticated activist tactics including proxy fights and stalking horse bids. Whether activists take a surgical or broad approach to the M&A market depends on how many companies look vulnerable and how quickly the window for dealmaking is likely to remain open.
We’ve posted the transcript for our recent webcast: “The Brave New World of Antitrust Merger Review & Enforcement.” Our panelists provided insights into a number of aspects of the changing antitrust regulatory environment. Topics addressed by the panel included:
– Overview of FTC & DOJ Policy and Priority Changes
– Industries and Issues Under Scrutiny
– Implications for HSR Merger Review
– Resolving FTC or DOJ Challenges in the New Environment
– Post-Closing Challenges to Deals — A Growing Risk?
– Litigating with the Antitrust Agencies
Will the SEC’s recent adoption of rules mandating the use of universal proxies change the game for proxy contests? What should companies do now to prepare for the new regime? Join us tomorrow for the webcast – “Universal Proxy: Preparing for the New Regime” – to hear Goodwin Proctor’s Sean Donohue, Gibson Dunn & Crutcher’s Eduardo Gallardo, Sidley Austin’s Kai Liekefett and Hogan Lovells’ Tiffany Posil discuss these and other issues associated with the looming universal proxy requirement.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to submit our state and license number and complete the prompts during the program.
LPs recognize that the rapid growth of continuation funds represents a significant evolution of the private markets ecosystem – an evolution whose implications are yet to be fully clear. A majority of PE investors believe the principal effect will be to strengthen the overall private markets ecosystem, but a sizable minority believe the change will be more profound, serving to undermine PE’s traditional 10-year-fund model.
Two thirds of LPs believe that continuation funds are likely to prove good owners for their portfolio companies. However, some LPs remain to be convinced – one third believe that the companies in continuation funds might have had better prospects with different, third-party owners.
The report also says that 56% of LPs say that they are changing their business practices in an effort to make themselves more attractive co-investment partners for general partners. Specific efforts include more rapid decision-making, developing expertise in particular areas of the market or expressing a willingness to bear some of the economics on co-investments.
This blog was supposed to be published yesterday, but I mistakenly set the publication date for 2021, so it ended up being posted on that date’s page. This was my first public screw-up of 2021 2022, but it undoubtedly won’t be my last.