In our latest “Deal Lawyers Download” Podcast, H/Advisors Abernathy’s Dan Scorpio joined me to discuss the evergreen topic of deal leaks. We addressed the following topics in this 16-minute podcast:
– Overview of H/Advisors Abernathy deal leaks report
– Reasons deals leak
– Characteristics that make a deal more or less likely to spring a leak
– Particular industries whose deals seem more prone to leaks
– The stages in the deal process where leaks most commonly occur
– Advance planning for deal leaks
– Factors to consider when thinking about how to respond to a leak
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.
A recent Goodwin memo says that the amount of time required to complete major M&A transactions has risen across the globe, with the average time between signing and closing for $10+ billion mega deals rising by 66% in the US, 19% in Europe, and a staggering 125% in the Asia-Pacific region. timeframe. Not surprisingly, the primary culprit here is the regulatory review process, and the firm has some thoughts on how parties can navigate the delays associated with these longer time frames. This excerpt discusses the implications of potential delays that buyers and sellers should consider when negotiating closing conditions:
Plan for Regulatory Approvals. Buyers and sellers must identify which specific approvals are required from regulatory authorities (e.g., antitrust regulators, foreign investments regulators or industry-specific agencies) to legally complete the transaction but also to measure the expected length of the interim period, set the long stop date (which is the deadline for transaction completion, beyond which it will be abandoned unless both parties agree to extend) and negotiate the availability of the financing commitments (see below).
Carefully Negotiate the Material Adverse Change (MAC) Clause. A MAC clause allows buyers to exit a deal if significant negative events occur that affect the value or operation of the target company between signing and closing. This clause is particularly important during prolonged interim periods, as extended timelines increase the likelihood of unforeseen events.
When defining a MAC, buyers should aim for the broadest (e.g., events affecting the industry) and most subjective terms. Conversely, sellers should strive for narrow criteria, focusing on events with significant and lasting impacts on the target while excluding external events such as health crises, wars, terrorism, natural disasters, or market fluctuations. Sellers may also define a materiality threshold based on revenue, net assets, EBITDA, a percentage of the transaction consideration, or another criterion.
Buyers Must Secure Financing. Buyers can stipulate that the deal will close only if the required financing is available at the closing date. In any event, for deals with prolonged timelines, buyers must negotiate financing commitments that remain valid for the entire duration of the interim period, up to the long stop date (and any extension). They should also be prepared for the lenders to charge ticking fees given the extended timeline.
Make Deal Completion Contingent on Covenant Compliance. Longer deal timelines increase the likelihood of covenant breaches in which one party fails to fulfill its agreed-upon obligations. Buyers may require that the deal’s completion be contingent on the absence of any breaches in business conduct or other material covenants between signing and closing, rather than seeking indemnification.
Other topics addressed in the memo include the possibility of negotiating “hell or high water” divestiture obligations and reverse termination fees, the need to address potential valuation changes during the period between signing and closing, and the need to manage the disclosures against reps & warranties.
With the uncertainties surrounding US tariff policies likely to continue for some time, parties to acquisition agreements need to determine how to allocate the risks associated with tariffs in those agreements. This recent BakerHostetler memo identifies possible approaches to that process. Here’s an excerpt from the memo’s discussion of how reps and warranties can be used to allocate tariff risks:
A buyer may seek either to add specific, tariff-related representations and warranties or alternatively to supplement other more traditional representations and warranties with language addressing tariffs. For example, a buyer may desire to include tariff-related language in connection with a seller’s representations about its customers and suppliers, and its and their respective supply chains, including (a) whether any such relationships have been terminated or modified due to new tariffs, (b) if applicable, whether a seller’s inventory has become more difficult to obtain or turn over in a timely fashion, (c) country-of-origin information, (d) current tariff rate, and (e) volume of supply broken down by supplier.
A buyer may also seek to expand more traditional tax representations to include language addressing the impact of tariffs on the business. Another possibility would be to expressly include tariff-related language in the common representation concerning the absence of changes to prompt more specific disclosure from the seller about announced, recently effective, or proposed tariffs on various products, goods, and services.
In contrast, a seller should take care when preparing its disclosure schedules to consider the impact of tariffs on traditional representations regarding (i) the absence of undisclosed liabilities and (ii) whether the financial statements fairly present the financial condition of the seller’s business in light of any recently enacted tariffs. If a seller takes steps to reduce a target company’s imports, additional disclosures about acting outside of the ordinary course of business may be warranted.
The memo also addresses ways that indemnification provisions, interim operating covenants, closing conditions, MAC clauses, and earnouts, holdbacks and purchase price adjustments may be used to allocate tariff-related risks.
This Sidley Enhanced Scrutiny blog discusses the Delaware Chancery’s recent “rare pre-discovery dismissal of an entire fairness claim” in In re Skillsoft Stockholders Litigation (Del. Ch.; 2.25). The claim involved the acquisition of Codecademy by Skillsoft in November 2021, shortly after Skillsoft went public via de-SPAC. In the de-SPAC, Prosus acquired a 38.4% stake in Skillsoft. It also held a 24% interest in Codecademy. Skillsoft’s stock price decreased after the Codecademy acquisition was announced, and stockholders brought derivative claims, saying Prosus was a conflicted controller.
Despite finding that plaintiffs were excused from making a demand on the board and applying entire fairness with controller Prosus standing on both sides of the transaction, VC Laster still granted the defendants’ motion to dismiss.
Although entire fairness review applied, the court held, the complaint should still be dismissed entirely. The dispositive fact was that Prosus owned a bigger interest on the buy side of the transaction—37.5%, as opposed to 24% on the sell side. Prosus’s interests were aligned not with Codecademy but with Skillsoft. That was enough to conclude that economic fairness, or fair price, was satisfied. “In that setting, overpaying is not a way to transfer value. It’s a way to deplete value,” the court said. That was “enough to negate the inference of pricing unfairness, at least absent some other explanation.”
That fact eclipsed the court’s concerns about procedural fairness, including the contrary fact that there was “relatively little board involvement.” Because Prosus’s interest was aligned with Skillsoft, and the directors’ interests were aligned with Prosus, entire fairness was satisfied.
The blog notes that this is an uncommon outcome but not unheard of:
This was the “rare case,” Vice Chancellor Laster concluded, when “at the pleading stage, in the face of the application of the entire fairness test, [one] cannot reasonably infer [un]fairness.” Rare, but not unprecedented: as this blog previously reported, the Delaware Court of Chancery recently dismissed an entire fairness claim in White v. Hennessy, where Sidley represented the defendants.
Earlier this week in Siegel v. Morse (Del. Ch.; 4/25), the Chancery Court dismissed a stockholder challenge to a company’s recently amended advance notice bylaws as unripe — confirming that Delaware courts must be presented with a genuine dispute before undertaking an equitable review of a company’s bylaws. This Richards Layton alert describes the facts as follows:
In August 2023, the board of directors of The AES Corporation amended AES’s advance notice bylaws following the SEC’s adoption of the universal proxy rule. [An AES stockholder] sued AES and its board to challenge the amendments. Plaintiff originally claimed that the amended bylaws were facially invalid and that the board breached its fiduciary duties by amending the bylaws . . .
Plaintiff then amended his complaint in light of Kellner, removing his facial invalidity challenge and resting on his fiduciary claim. Plaintiff’s claim focused on two purported issues with the amended advance notice bylaws: the “acting in concert” definition and an ownership provision that required nominating stockholders to disclose any equity interest in AES (including synthetic and derivative ownership interests, short interests, and hedging arrangements), along with their history of ownership of stock or derivative interest in AES (the “Ownership Provision”). The Ownership Provision also required a nominating stockholder and any person “acting in concert” with such stockholder to disclose any performance-related fees they would receive if AES’s stock appreciated or depreciated.
The court took issue with the fact that the plaintiff wasn’t asking for himself or even asking for a friend. There was no pending or imminent proxy contest, plaintiff did not intend to nominate a director and could not identify any stockholder who “intends to run a proxy contest, is considering running one, or, for that matter, says he, she or it is ‘chilled’ . . . it appears Plaintiff seeks a declaration that the bylaw is ‘unenforceable’ as to all stockholders.”
Plaintiff tried to point to excerpts from slides prepared by the company’s counsel to suggest a selfish, disloyal or defensive motive, but VC Cook disagreed, saying the the board — like many boards — revisited the bylaws after the adoption of the universal proxy rules and the slides contained only “generic references to stockholder activism.” Such references do not “demonstrate that a genuine, extant controversy exists.” Accordingly, VC Cook found the challenge to be hypothetical and “precisely the sort of case” where the court should postpone review until a concrete dispute exists.
In 2024, the Uniform Law Commission published the Uniform Antitrust Premerger Notification Act for consideration by state legislatures. Per the ULC’s summary, to facilitate state AGs’ authority to enforce federal and state merger law, the act would create a process for a state AG to receive an HSR form when the person filing it has a principal place of business in the state or it (or its control person) had annual net sales in the state of goods or services involved in the transaction of at least 20% of the filing threshold.
As this S&C alert notes, the act has recently been signed into law in Washington State — the first state to enact it. But it’s also under consideration in other states. (Per this map from the ULC, it’s been introduced in California, Colorado, Hawaii, Nevada, Utah, Washington DC and West Virginia.)
The APNA requires that a copy of the HSR Form be provided contemporaneously to the Washington State Attorney General if the person making the HSR Act filing (i) has its principal place of business in Washington State, (ii) had annual net sales in Washington State of the goods or services involved in the transaction of at least $25.3 million (i.e., 20% of the current $126.4 million HSR Act threshold), or (iii) is a healthcare provider or organization, as defined under state law, conducting business in Washington State. The statute will become effective on July 27, 2025. It requires notice but does not have suspensory effect on a pending transaction.
The alert says that parties making HSR filings will now need to submit in Washington State if their principal place of business is located there or, if not, consider state-level sales data to determine whether a submission in the state is required. Moreover, a state-by-state jurisdictional analysis may end up being a necessary part of the HSR Act filing process to the extent additional states pass the act (and states are free to deviate from the uniform act). Of course, that has already been a reality for some transactions — as we’ve previously shared, there are many state laws on the books that require state-level filings but, thus far, those have mostly been limited to transactions that may impact health care in the state.
I recently blogged about the interesting circumstances surrounding the buyer’s decision to try to get out of the deal at issue in Desktop Metal v. Nano Dimension (Del. Ch.; 3/25). The lawsuit concluded with Chancellor McCormick requiring the buyer to sign a national security agreement with CFIUS to satisfy the final closing condition.
This Sheppard Mullin blog focuses on the court’s weight of the CFIUS-imposed national security-related conditions against the buyer’s contractual closing obligations. Here are the blog’s key takeaways:
Hell-or-High-Water Provision: A pivotal aspect of the court’s decision was the interpretation of a “hell-or-high-water” clause in the transaction merger agreement. This clause required Nano Dimension to undertake all necessary actions—including agreeing to several enumerated conditions typically requested by CFIUS—to secure approval, subject to limited exceptions (i.e., a condition that would require Nano to relinquish control of 10% or more of its business). The court found that Nano Dimension breached this obligation through both its negotiating posture with CFIUS in relation to the NSA and by delaying the CFIUS approval process.
CFIUS Approval Strategy: Desktop Metal’s operations in critical technology sectors resulted in a complicated CFIUS approval process. The ruling emphasized that transaction parties should be aware of the potential for CFIUS to rely on NSAs impacting post-closing operations to address potential national security risks associated with foreign control.
It concludes with this recommendation:
The court’s decision illustrates the importance of clear contractual language detailing the relative obligations of the parties to obtain CFIUS approvals. We recommend that transaction parties carefully consider the implications of CFIUS approval language included in transaction documents:
– For example, agreements should clearly delineate what conditions would be considered reasonable mitigation conditions that a potential buyer must accept (e.g., data security practices and auditing mechanisms) and those conditions that would not trigger an obligation to close (e.g., divestment of certain business lines or the use of proxy boards).
– The use of clear language outlining stakeholder alignment, permissible negotiation strategies and timing considerations with respect to CFIUS approval also contribute to the likelihood of a better outcome with CFIUS.
On Friday, Corp Fin posted a handful of new CDIs. Most address questions related to Dodd-Frank clawbacks, but new Exchange Act Rules CDI 253.03 addresses co-registrants in a de-SPAC transaction. Here it is:
A SPAC completed a de-SPAC transaction wherein the target company or companies were included as co-registrants on the effective Securities Act registration statement for the de-SPAC transaction. As a result, these co-registrants incurred an obligation to file reports under Section 15(d) of the Exchange Act upon effectiveness of the de-SPAC registration statement. Notwithstanding that a class of securities offered and sold using such registration statement remains outstanding, consistent with the Commission’s discussion beginning on page 204 of Release No. 33-11265 (Jan. 24, 2024), once the de-SPAC transaction has closed, the staff will not object if each target company files a Form 15 to suspend its 15(d) reporting obligations in reliance on Rule 12h-3 as long as the target company is wholly owned by the combined company and the target company remained current in its 15(d) reporting obligations through the date of filing the Form 15.
Ropes & Gray recently published a survey of trends in Private Equity mergers & acquisitions. One interesting development noted in the survey is the increasing use full equity backstops in PE deals. In a fully backstopped deal, the sponsor provides an equity commitment in the full amount of the purchase price, so that the deal will close even if the debt piece of the financing falls apart.
This deal structure has been around for some time, but in recent years, the use of reverse termination fees to provide sellers with some comfort about closing certainty has been a much more common approach. Ropes & Gray says that based on data from the deals the firm’s been involved with, that’s changed over the past year:
The thawing of the financing markets in 2024 made for a more competitive landscape, and PE sponsors increased their use of the “full equity backstop” (as compared to reverse termination fees (RTFs)) to make their bids more attractive. In the more challenging M&A landscape of 2023, the use of the full equity backstop declined in our dataset to the lowest level in five years, and over 60 percent of our 2023 transactions used the RTF construct. However, in transactions that R&G closed in 2024, PE sponsors once again took advantage of the “full equity backstop” structure, and 60 percent of our transactions included that construct, which was the highest percentage that we have ever seen.
The survey also found that financing conditions, which were common in prior decades, didn’t appear in any of the deals reviewed in 2024, and the average size of reverse termination fees for sponsor-backed deals that used that structure remained in the 5 to 6% range.
I’m on record as not being a fan of letters of intent. That being said, a lot of clients are, and every deal lawyer needs to know their way around the barrel full of issues associated with them. This recent Mintz memo provides an overview of some of the key issues that sellers should have a full understanding of before signing up for a letter of intent. This excerpt addresses purchase price adjustments:
In US M&A the standard is for businesses to be purchased on a cash free, debt-free basis and delivered with a normalized level of working capital. It is common for LOIs to simply leave it there; however, sellers should evaluate if it is favorable to have a bespoke calculation of working capital (i.e. specifically including or excluding certain items) and/or separate credits or adjustments to the purchase price for other items such as tax assets.
Additionally, sellers should evaluate if a working capital collar (i.e. a band surrounding the working capital target where no adjustment up or down is made) is appropriate to avoid nickel and diming in the ultimate working capital adjustment. Addressing these points at the LOI stage is more likely to yield a positive result for the sellers as the buyer is more likely to make concessions at this point in order to secure the deal and get the sellers to sign the LOI and agree to exclusivity.
Other topics include indemnification & RWI, earnout considerations, equity rollover arrangements, and exclusivity and other binding provisions of the LOI. If you’re looking for more resources on letters of intent, be sure to check out our “Letters of Intent” Practice Area and the discussion beginning on page 120 of the Practical M&A Treatise.