There’s an interesting detail in the press release announcing Standard General’s $5.4 billion acquisition of TEGNA – it turns out that the buyer has agreed to pay a “ticking fee” if the closing is delayed:
Under the terms of the definitive merger agreement, in addition to receiving $24.00 per share, TEGNA shareholders will receive additional cash consideration in the form of a “ticking fee” of $0.00167 per share per day (or $0.05 per month) if the closing occurs between the 9- and 12-month anniversary of signing, increasing to $0.0025 per share per day (or $0.075 per month) if the closing occurs between the 12- and 13-month anniversary of signing, $0.00333 per share per day (or $0.10 per month) if the closing occurs between the 13- and 14-month anniversary of signing, and $0.00417 per share per day (or $0.125 per month) if the closing occurs between the 14- and 15-month anniversary of signing.
Ticking fees are by no means unheard of as a way to allocate the risks associated with antitrust regulatory approvals, but they haven’t been a popular option in the past. However, as antitrust regulators increase their scrutiny of potential deals, it’s possible that other dealmakers might consider ticking fees as part of their efforts to allocate regulatory risk.
But if you’re considering the possibility of a ticking fee, keep in mind that there are reasons why this mechanism has only rarely been used. You should take a look at this Paul Hastings memo, which provides an overview of the positives and negatives of ticking fees. This excerpt highlights one potentially big negative from a buyer’s perspective:
Once a transaction is announced, a potential interloper with perceived low regulatory risk may view a ticking fee as a signal that the parties have serious regulatory concerns. The existence of the ticking fee could therefore potentially act as inducement for an interloper to try to disrupt the transaction.
Bloomberg Law’s Grace Maral Burnett has a new article that looks at references to cryptocurrencies & crypto assets in publicly filed acquisition agreements. References to crypto appeared in 24 public deal docs last year. That may not sound like a lot, but it’s an all-time record & enough to see some drafting trends begin to emerge – including where in acquisition agreements crypto references are likely to appear.
In addition to cataloging that information, the article excerpts some specific crypto language in MAE clauses, reps & warranties, and even in a post-closing covenant addressing employee compensation. The article also flags an interesting termination provision allowing a buyer to walk in the event of a decline in the price of bitcoin. Here’s that provision:
Termination. This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 8.01(b) through 8.01(k), by written notice by the terminating party to the other party), whether before or, subject to the terms hereof, after approval of the Merger Partner Voting Proposal by the Shareholders of Merger Partner or approval of the Public Company Voting Proposals by the Shareholders of Public Company:
[…]
by Public Company, at any time prior to the Effective Time, if the seven day moving average price of Bitcoin, as reported on Binance as “MA(7)”, falls below $15,000. (Gryphon Digital Mining Inc.–Sphere 3D Corp. Agreement and Plan of Merger dated June 3, 2021 (governing law: Delaware))
It’s interesting to note that the agreement was subsequently amended to eliminate that termination right as part of an overhaul of the deal’s termination provisions. If you’re interested, you can check out the discussion of that amendment & related changes to the deal that appears on p. 138 of Sphere 3D’s proxy statement/prospectus for the transaction.
Check out our new Deal Lawyers Download podcast, featuring my interview with Faegre Drinker’s Oderah Nwaeze about his recent article on protecting emails from production in books & records litigation. Topics addressed in this 15-minute podcast include:
– Background on Section 220 demands and books & records litigation.
– What “books and records” are stockholders entitled to review?
– How do director emails & texts become subject to production as books & records?
– Is it only email accounts at the corporation that may need to be produced?
– What can be done to avoid having to produce emails & texts in response to a Section 220 demand?
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.
Enjoy the holiday weekend & thanks for reading. We’ll see you back here on Tuesday of next week.
It looks like one of the emerging trends in recent Delaware case law is an increased willingness to allow claims against buyers premised on allegations that they aided & abetted the seller’s directors and officers in breaching their fiduciary duties. This Milbank blog takes a look at these cases and offers some advice to buyers about how to protect themselves against aiding & abetting claims.
One of the ways that recent cases have tagged buyers is by citing contractual provisions that give the buyer the right to review the seller’s proxy disclosures. Plaintiffs have successfully alleged that a buyer’s failure to object to omissions in the seller’s disclosure about potentially problematic contacts may serve as evidence of knowing conduct. This excerpt from the blog provides some advice to buyers about how to help avoid having a contract right intended to protect them used to support a plaintiff’s aiding and abetting claims:
Finally, to eliminate the “contractual hook” relied on by the courts in both Mindbody and In re Columbia Pipeline Group, Inc., the merger agreement’s covenant to correct target’s disclosure could be written to limit buyer’s obligation to participate in target’s proxy disclosure to providing target with information only about buyer itself – such that any disclosure required to be made regarding meetings held with target management, the terms of preliminary offers made to target and judgments regarding the materiality of any other information in the possession of target (such as projections) would be the sole responsibility of target. This should have the effect of requiring some showing that buyer actually knew of the fiduciary’s breach, as plaintiffs will not be allowed to rely on the breach of the information covenant to demonstrate “knowing participation” in the fiduciary breach.
The blog also makes a compelling argument that it is inappropriate to use these contractual provisions as a basis for aiding & abetting claims, noting that “buyers are not typically privy to communications between a CEO and board regarding process matters, so that much evidence of a poorly run process may be hidden from buyer’s view.”
We’ve posted the transcript for our recent webcast: “Universal Proxy: Preparing for the New Regime.” Our panelists provided insights into a number of aspects of the changing antitrust regulatory environment. Topics addressed by the panel included:
– An Overview of the Universal Proxy Requirement
– Proxy Contests Under the New Regime
– Universal Proxy’s Influence on Activist Strategies & Tactics
– Bylaw Issues
– Other Rule Changes & Implications for Disclosure Controls and Procedures
– Advice for Companies in Advance of the Compliance Date
In Wei v. Zoox(Del. Ch.; 1/22), the Chancery Court granted a protective order limiting the discovery that a company would be otherwise be required to provide to petitioners in an appraisal proceeding. The case arose out of Amazon’s 2020 acquisition of Zoox, a private company. The petitioners followed their appraisal demand with a Section 2020 inspection demand, but the company refused to comply with it because the merger had already closed.
Subsequently, the petitioners withdrew their appraisal demand for 95% of the shares that they owned, and filed an appraisal action in the Chancery Court. They subsequently submitted a detailed document request to Zoox, which the company partially complied with. In arguing that it should not be required to comply fully with the petitioners’ discovery demands, Zoox argued that the petitioners were improperly using the appraisal proceeding as a means to investigate a potential breach of fiduciary duty claim. Chancellor McCormick agreed, and this Potter Anderson blog summarizes her reasoning:
While acknowledging that Delaware courts have allowed appraisal petitioners to use discovery adduced in appraisal proceedings in parallel or later-filed actions, the Court evaluated the policy considerations underlying Sections 220 and 262 and concluded that appraisal petitioners should not be permitted to obtain full discovery in an appraisal proceeding initiated solely for the purpose of conducting a pre-suit investigation. Doing so would allow stockholders seeking to conduct a pre-suit investigation to do so under the Rule 26 standard for obtaining discovery in appraisal proceedings rather than the narrower standard for obtaining books and records under Section 220.
That would make appraisal proceedings more attractive than Section 220, contrary to the Court’s guidance that stockholders employ Section 220 for such pre-suit investigations. The Court reasoned, however, that where, as here, an appraisal proceeding is pursued because the Section 220 path is blocked, a trial court has discretion to limit discovery to the scope of what the petitioner could have obtained under Section 220.
The Court concluded the petitioners filed the appraisal action as a substitute for Section 220 on the grounds that “objectively discernable facts reflect” that seeking appraisal was “an economically irrational investment” given the small dollar amounts at stake, and the petitioners did not deny that such an investigation was one of their aims. The Court thus granted Zoox’s protective order in part, limiting petitioners to the discovery that they would have obtained in a Section 220 proceeding.
The blog also points out that Zoox’s status as a private company is central to the case, and the issues presented here are unlikely to arise in public company transactions. There are two reasons for that conclusion. First, the federal securities laws ensure that public company stockholders have enough advance notice of a merger to pursue books and records actions prior to closing, which means they wouldn’t have to use the appraisal mechanism as a substitute. Second, Section 262(g) of the DGCL requires appraisal petitioners in most public company deals to obtain at least 1% of the outstanding eligible shares or shares worth $1 million. That relatively high filing bar “would most likely prevent petitioners from using ‘economically irrational’ appraisal petitions to pursue books and records concerning most mergers involving publicly traded companies.”
KPMG has put together this whopping 615-page handbook on accounting for business combinations. To my knowledge, this is the first comprehensive resource from one of the Big 4 that addresses accounting for de-SPAC transactions. Check out this excerpt from the discussion of how to determine the accounting acquirer in a deal involving a SPAC:
The accounting acquirer determination in a SPAC merger is critical because it dictates the accounting basis of the merged entity. Additionally, determining the predecessor is often correlated with this determination, which affects the form and content of financial statements required in SEC filings. While the SPAC is typically the legal acquirer, the accounting does not always follow the legal form. In many cases, the target company (the legal acquiree) will be considered the accounting acquirer in what is referred to as a reverse recapitalization. When the SPAC is both the legal and accounting acquirer the transaction is commonly referred to as a forward merger.
Similar to a reverse acquisition involving a shell company (see Paragraphs 9.014 through 9.015), a reverse recapitalization is in substance the issuance of shares by the target company for the net monetary assets of the SPAC, accompanied by a recapitalization. This is because, in most cases, the SPAC will not meet the definition of a business and its only assets are cash and cash equivalents (e.g., nonmonetary assets are nominal).
Conversely, in a forward merger, the transaction is accounted for as a business combination or asset acquisition, depending on whether the target company meets the definition of a business (see Section 2). Because of the significance of the target company’s operations relative to those of the SPAC, the target company is usually considered the predecessor entity for SEC reporting purposes.
The handbook also addresses changes to the standards governing the treatment of deferred revenue in a business combination made by ASU 2021-08, which FASB adopted late last year.
In recent years, ESG issues have increasingly become important in mergers and acquisitions, capital markets transactions and shareholder activism. Today, if you’re advising clients on M&A or other transactional matters, it’s essential that you stay on top of the latest developments on the ESG front. That’s why we’re pleased to announce that our PracticalESG.com membership site is now live! Similar to DealLawyers.com and other CCRcorp sites, a membership will allow you to take a giant step forward by connecting the dots on complicated issues.
Subscribers to our free PracticalESG.com blog can continue to read our take on what ESG developments mean to companies & their advisors on a daily basis – that will not go away! With a PracticalESG.com membership, though, you’ll gain the additional benefit of a filtered content library (a huge help for anyone trying to wade through the deluge of ESG info and make sense of it all) – as well as checklists, guidebooks, member-exclusive blogs, and benchmarking surveys. You’ll also be able to access regular programming and a community Q&A forum, which means you can learn from and trade ideas with other practitioners in the ESG trenches. And it’s all being led by folks with decades of experience with Environmental, Social & Governance issues.
Among other topics, we’ll provide practical guidance about establishing, tracking & communicating:
– ESG due diligence and other M&A-related topics;
– Environmental commitments;
– Diversity, equity & inclusion initiatives;
– Supply chain issues;
– Corporate culture; and
– Management and board oversight processes for environmental & social risks and opportunities
To kick off this valuable new resource, we are offering early members 25% off of the regular subscription pricing. Email sales@ccrcorp.com today – or call 1-800-737-1271 – to take advantage of this promotional offer and get tools to make your ESG efforts easier & more successful.
Yesterday, the SEC announced proposed amendments to 1940 Act rules governing private fund advisers. Here’s the 341-page proposing release and the more digestible two-page fact sheet. According to this excerpt from the fact sheet, the proposed rules would:
– Require private fund advisers registered with the Commission to provide investors with quarterly statements detailing information about private fund performance, fees, and expenses;
– Require registered private fund advisers to obtain an annual audit for each private fund and cause the private fund’s auditor to notify the SEC upon certain events;
– Require registered private fund advisers, in connection with an adviser-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the adviser and the opinion provider;
– Prohibit all private fund advisers, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors; and
– Prohibit all private fund advisers from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors.
The proposed rule would also require all registered advisers to document the annual review of their compliance policies and procedures in writing.
One aspect of the proposed amendments that’s certain to draw plenty of attention is the SEC’s proposal to prohibit certain types of preferential treatment for selected investors. All private fund advisers would be prohibited from providing preferential terms to favored investors on fund redemptions or information on portfolio holdings or exposures that isn’t provided to all investors. While side letters on other investment terms would continue to be permitted, any preferential treatment provided under the terms of those arrangements would have to be disclosed to current and prospective investors.
Comments on the proposal are due by the later of 30 days after the date that it’s published in the Federal Register or April 11,2022. We’ll be posting memos in our “Private Equity” Practice Area.
Transition Services Agreements are an important component of many M&A transactions. Because the parties don’t always know at the outset the nature and extent of the services that will be required, they are often also quite complex agreements to negotiate and implement. This Willis Towers Watson blog – which is the first in a series of blogs on TSAs – provides an overview of the key considerations that buyers and sellers in preparing to enter into a TSA. This excerpt addresses the big picture issues that a seller should keep in mind:
For a seller, it is critical to determine, well in advance of a deal, what support can and should be provided, for how long and at what price. It is also important to understand interdependencies between TSA items. For example, does the target need to remain on the human resources information system (HRIS) to maintain payroll under the TSA?
A seller also needs to determine if the divested business provides resources, support, processes or technology to the RemainCo. If so, the seller may need reverse TSA services. A reverse TSA allows the divested business to provide support to the seller or former parent. However, providing services to the buyer in support of a business that the seller is exiting will not always be high on the priority list of the seller, nor does it always make sense.
Nevertheless, as a seller, if you do not prepare, you may be end up with your back against the wall during the heat of an M&A negotiation. This may result in your business providing broader services or for a long duration just to get the deal done. But with planning and preparation, you will have more control and may be able to structure the deal in such a way that the TSA services will be minimized or may not be required.
The next blog in the series addresses how to structure an effective TSA and a governance process that ensures that the provision of services, billing and exit arrangements are efficient and effective.