Elon Musk has made a career out of playing with fire and somehow avoiding getting badly burned. I guess it helps to be the richest guy in the world, but from “funding secured” to Solar City to his latest shenanigans with Twitter, Elon has blissfully trolled all comers without a lot of consequences. However, recent Delaware case law suggests that despite the limitations on liability in the Twitter merger agreement, he still might stumble into a world of hurt if he keeps trying to simply troll his way out of his deal to buy Twitter.
As I blogged previously, the Twitter merger agreement contains a fairly typical private equity style limited specific performance clause. While Section 9.9(a) of the agreement imposes full specific performance obligations on the entities Musk formed to acquire Twitter, you can’t get blood from a stone, and the ability of those entities to perform their obligations depends on the availability of the financing that’s been committed to the deal. In order to ensure that’s available, Section 9.9(b) of the agreement imposes a limited specific performance obligation on Musk to fund his equity commitment in the event that, among other things, the debt financing is in place.
Of course, Musk is now publicly angling to renegotiate the purchase price of his deal by challenging the accuracy of Twitter’s public statements concerning its percentage of spam accounts. Most people evaluating the situation seem to have concluded that Musk’s downside is limited to the $1 billion reverse breakup fee, and that may well be the case based on the language of the contract. But he’s a loose cannon, and if he doesn’t exercise a little impulse control, it’s at least possible that he could find himself with a much deeper downside.
That’s because last year, in Snow Phipps Group v. KCake Acquisition, (Del. Ch.; 4/21), the Chancery Court rejected a private equity buyer’s claim that the seller had experienced a MAE and accepted the seller’s contention that the buyer’s conduct breached its obligations under the agreement’s financing covenant, which resulted in the deal’s failure to close. Invoking the “prevention doctrine,” a common law rule that says if a party caused the other side’s failure to perform, it can’t use that failure to excuse its own performance, then-Vice Chancellor McCormick ordered the private equity buyer to close the deal, despite the fact that the contract contained only a limited specific performance clause. In other words, she essentially rewrote the contract and ordered full specific performance based on the buyer’s misconduct.
If Twitter holds the line on Musk’s attempt to renegotiate the purchase price, his next step presumably would be to try to litigate his way out of the deal by alleging that Twitter’s issues with spam accounts represented a breach of its rep in Section 4.6 of the merger agreement concerning the accuracy of information in its SEC filings. In order to avoid closing & ultimately terminate the deal, Section 7.2(b) of the agreement would require Musk to show that the failure of that rep – and any other that he threw into the mix – to be accurate resulted in an MAE.
As everyone reading this knows, proving a MAE is always tough sledding, but it’s likely to be a lot tougher when the smart money already has concluded that his alleged concerns about spambots are just a pretext. It’s also likely not helpful that Musk has been blasting accusations and other negative commentary about the company & its management all over social media with apparent disregard for the non-disparagement obligations he signed up for in Section 6.8 of the merger agreement.
What’s more, Section 6.3 of the agreement imposes an obligation on the parties to use their reasonable best efforts to consummate the deal, and Section 6.10 of the agreement is a financing covenant that imposes plenty of obligations on Musk and his entities, including an obligation to take or cause to be taken “all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange, obtain and consummate” the financing arrangements for the deal.
Navigating these contractual obligations is by no means impossible, and even if Musk isn’t able to wiggle his way out of the deal or persuade Twitter to renegotiate, the most likely outcome under the contract would appear to be his payment of a $1 billion reverse termination fee to exit the deal. But Elon Musk is a guy who has demonstrated a propensity to play stupid games. If he plays stupid games with his obligations under the merger agreement, then despite what the contract says, there’s a chance that he could win some very stupid prizes in the Delaware Chancery Court.
Earlier this month, Spirit Airlines’ board rejected JetBlue’s efforts to persuade it to abandon its deal with Frontier in favor of JetBlue’s competing proposal. Yesterday, JetBlue announced that it had launched a tender offer for Spirit’s outstanding shares. Most media reports characterized the offer as “hostile,” and in a sense that’s true, because the offer certainly wasn’t welcomed by Spirit’s board. But as Ann Lipton noted on her Twitter feed, like most other unsolicited tender offers announced in recent years, this one isn’t really all that hostile. Why? Here’s an excerpt from JetBlue’s Offer to Purchase, which discusses one of the conditions to its offer:
Consummation of the Offer is conditioned upon, among other things . . . JetBlue, the Purchaser and Spirit having entered into a definitive merger agreement (in form and substance satisfactory to JetBlue in its reasonable discretion) with respect to the acquisition of Spirit by JetBlue providing for a second-step merger pursuant to Section 251(h) of the General Corporation Law of the State of Delaware (the “DGCL”), with Spirit surviving as a wholly-owned subsidiary of JetBlue, without the requirement for approval of any stockholder of Spirit. . .
That language indicates that JetBlue’s tender offer is contingent on the Spirit board authorizing it to enter into a merger agreement with Jet Blue. Legally, that’s a big deal, because while Delaware would ordinarily subject a board’s decision to resist a tender offer to heightened scrutiny under the Unocal standard, that isn’t necessarily the case when a deal is conditioned upon a merger agreement.
As we’ve discussed before, when a bidder conditions its offer on a merger agreement, the board’s decision as to whether or not to enter into that agreement generally is subject to business judgment review. Here’s an excerpt from Chancellor Allen’s opinion in TW Services, Inc. v. SWT Acquisition Corp., (Del. Ch.; 3/89):
“The offer of SWT involves both a proposal to negotiate a merger and a conditional tender offer precluded by a poison pill. Insofar as it constitutes a proposal to negotiate a merger, I understand the law to permit the board to decline it, with no threat of judicial sanction providing it functions on the question in good faith pursuit of legitimate corporate interests and advisedly.”
So, from a purely legal perspective, this offer doesn’t put a lot of pressure on Spirit’s board – its decision not to enter into a merger agreement with JetBlue will likely be evaluated under the lenient business judgment rule standard. But the legal issues are ultimately secondary here. By launching a tender offer, JetBlue may help demonstrate its bona fides to Spirit’s investors, which may in turn increase the likelihood that Spirit’s shareholders will vote against the Frontier deal and increase the pressure on Spirit’s board to consider its competing proposal.
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.