Most acquisition agreements contain an “effect of termination” provision that limits the parties liability for pre-termination breaches. However, it is also common to include carve-outs from that limitation on liability permitting each party to hold the other responsible, post-termination, for any damages associated with certain pre-termination breaches of the agreement. This Gibson Dunn memo discusses factors that should be taken into account when negotiating effect of termination provisions and the related carve-outs in an evolving M&A market. Here’s an excerpt :
The scope of the pre-termination breaches subject to the carve-out typically is, and should be, scrutinized in transactions in which there is significant risk of the deal being terminated, such as due to a failure to receive regulatory approval or a debt financing failure. For example, in transactions in which the buyer is a financial sponsor and is relying on the availability of debt financing to pay the purchase price, the seller typically wants to ensure that, if the buyer fails to close the acquisition when required by the agreement, it has the ability to (i) keep the agreement in place and seek specific performance of the agreement to force the buyer to close, which may be limited to circumstances in which the buyer’s debt financing is available (i.e., a synthetic debt financing condition), or (ii) terminate the agreement and recover damages, often in the form of a reverse termination fee, from the buyer.
The effect of termination provision should not purport to foreclose recovery of the reverse termination fee, which in some transactions serves as liquidated damages and a cap on the buyer’s liability for pre-termination breaches. In other transactions, the effect of termination provision may also permit the seller to recover damages beyond or irrespective of a reverse termination fee, frequently limited to circumstances in which there was an “intentional” or “willful” pre-termination breach by the buyer of its obligations.
The memo goes on to note that in a very competitive M&A market, buyers have become more willing to agree to bear regulatory approval risk and for private equity buyers to backstop the entire purchase price with equity in lieu of a synthetic debt financing condition or reverse termination fee. These additional commitments make it even more important to closely scrutinize effect of termination language.
When it comes to sellers, the memo points out that the scope of liability for pre-termination breaches needs to be considered in light of the availability of R&W insurance. In these situations, sellers frequently expect that they won’t face any liability for pre-termination breaches of reps & warranties aside from fraud claims.
The HSR Act generally provides a 30-day period for review of a pending merger transaction by the FTC & DOJ. While post-closing challenges do occur from time to time, the expiration of the HSR waiting period without receipt of a second request is usually taken as a sign that the deal doesn’t raise antitrust concerns. However, the FTC’s Bureau of Competition blogged yesterday that the agency is so swamped with HSR filings that it isn’t able to complete its review of many transactions within that 30-day period. If the agency hasn’t completed its review, then this excerpt says that you move forward with your deal at your own risk:
This year, the FTC has been hit by a tidal wave of merger filings that is straining the agency’s capacity to rigorously investigate deals ahead of the statutory deadlines. (We now post our monthly HSR figures on the website and they are astounding.) We believe it is important to be upfront about these capacity constraints. For deals that we cannot fully investigate within the requisite timelines, we have begun to send standard form letters alerting companies that the FTC’s investigation remains open and reminding companies that the agency may subsequently determine that the deal was unlawful.
Companies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk. Of course, this action should not be construed as a determination that the deal is unlawful, just as the fact that we have not issued such a letter with respect to an HSR filing should not be construed as a determination that a deal is lawful.
If your deal is one as to which the FTC’s investigation remains open when the waiting period expires, here’s the form letter you can expect to receive from the agency.
This Dechert memo reports on the timing of merger investigations during the second quarter of 2021. Here are some of the highlights:
– Despite Big Tech headlines, the percentage of significant U.S. merger investigations involving technology companies was below the average for the last decade. By contrast, merger investigations in traditional sectors like industrial products and services and financial services increased. Meanwhile, healthcare and pharmaceuticals remained the largest focus of significant U.S. merger investigations, in line with historic averages.
– The 11 significant U.S. merger investigations concluded during the first half of 2021 under the Biden Administration (5 DOJ; 6 FTC) are well below the 17 concluded in the first half of 2020 (6 DOJ; 11 FTC), but close to the 12 concluded at the start of the Trump Administration in the first half of 2017 (4 DOJ; 8 FTC).
– The duration of significant U.S. merger investigations declined compared to last quarter. The average duration for first half of 2021 was 12.1 months, but there remains a wide disparity for individual investigations even within the same industries.
– An announced joint review of existing merger guidelines encouraged by the White House, combined with new leadership at both antitrust agencies, foreshadows potential bigger changes ahead.
Another thing that the first half stats make clear is that the agencies are ratcheting up enforcement pretty significantly. The memo points out that almost half of the significant U.S. merger investigations that were wrapped-up during the first half of 2021 resulted either in the filing of a complaint or a decision to abandon the transaction. By comparison, in the first half of the Trump administration’s first year, only two of 12 significant merger investigations concluded with a complaint or an abandoned transaction, and more investigations concluded in a complaint or an abandoned transaction in the first half of 2021 than in either 2017 or 2018.
The Committee on Foreign Investment in the United States recently published its Annual Report to Congress on all notices and declarations filed with CFIUS in 2020 and all reviews or investigations completed during the year. This Fried Frank memo summarizes the results of the report and discusses emerging trends. This excerpt discusses CFIUS’s 2020 investigations:
In 2020, 47% (88) of the 187 notices went into the 45-day investigation phase, following the 45-day review phase. This is consistent with 2019, when 49% of notices went into the investigation phase. The clearance rate during the review period has increased considerably since the August 13, 2018 effective date of FIRRMA, which extended the statutory review period from 30 to 45 days.
In 2017, prior to the implementation of FIRRMA, 73% of notices proceeded to the investigation phase. Similarly, 76% of notices filed in 2018 before FIRRMA’s effective date proceeded to investigation. The rate of investigation in 2020 may reflect not only CFIUS’s time pressure easing as a result of the additional time in the review period, but also the decrease in inbound sensitive Chinese investment that often triggered a CFIUS investigation.
Transaction notices were filed from 40 different countries in 2020. Japan was the largest filer with 19. China was second with 17 notices, which the memo points out continued a 3 year downward trend in filings by Chinese acquirers, which peaked at 60 in 2017.
Cybersecurity and data privacy concerns are an area of increasing legal and regulatory risk for all companies. This Grant Thornton memo says that buyers should develop an “M&A cybersecurity playbook,” an “M&A cybersecurity framework,” and an “M&A cybersecurity plan” in order to appropriately address the issues that may arise during the lifecycle of an M&A transaction.
The memo says that a cybersecurity playbook’s purpose is to help companies successfully identify and monitor these risks in an ongoing and repeatable way as part of their M&A activities. A cybersecurity framework provides a template for cybersecurity integration, while a cybersecurity plan leverages the M&A cybersecurity playbook and framework to plan both tactical and strategic actions during the M&A process. This excerpt lays out the type of tactical & strategic actions encompassed by a sample cybersecurity plan:
Tactical actions:
– Specific cybersecurity threat monitoring must begin on day one and continue for at least the first phase of the merger or acquisition.
– The due diligence risk assessment feeds into remediation of the high-risk issues, followed by remediation of the medium-risk and low-risk issues if needed.
– A compromise assessment provides important input for identifying and isolating potential incidents and taking immediate actions to address them.
Strategic actions:
– A comparative analysis of cybersecurity capabilities will inform the cybersecurity consolidation, business solution migration and subsequent support.
– The cybersecurity integration strategy forms an important foundation for integrating cybersecurity policies, processes, and suppliers.
– The target operating model for cybersecurity, once designed and established, will implement a one-team approach in supporting the cybersecurity program going forward with defined performance metrics and control monitoring.
Under Delaware’s MFW doctrine, a controlling stockholder and target board can avoid application of entire fairness review to a transaction on which the controller stands on both sides if, among other things, the transaction is conditioned from the outset upon both the approval of a well-functioning, independent special committee & the uncoerced, informed vote of a majority of the minority stockholders. A recent Delaware Chancery Court decision makes it clear that there aren’t any shortcuts around these requirements.
In Berteau v. Glazek, (Del. Ch.; 6/21), a special committee that approved such a transaction tried to persuade the Chancery Court that MFW should apply notwithstanding the fact that a merger with a controller wasn’t conditioned on approval by a majority of the minority stockholders. Vice Chancellor Fioravanti rejected that argument. This Sidley blog explains his reasoning:
Members of the Special Committee (but not the other director defendants) argued that the business judgment rule should apply pursuant to the MFW doctrine. The Court held that this argument “ignore[d] the history of the MFW doctrine and what it was intended to address.”
In MFW, the Delaware Supreme Court held that a controlling stockholder transaction would be subject to the business judgment rule where “the merger is conditioned ab initio upon both the approval of an independent, adequately empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders.” MFW thus created a pathway for controller transactions to obtain a pleading-stage, pre-discovery dismissal where (1) a special committee was formed to create a “bargaining agent who can negotiate price and address the collective action problem facing stockholders” and (2) a majority of the minority voted approvingly, thus giving stockholders the “chance to protect themselves.”
Because the defendants in Berteau had completed the transaction without a vote of TPB’s minority stockholders, let alone conditioning it on their approval, the Court reasoned that MFW’s business judgment protection could not attach, and found no principled reason to depart from, MFW’s dual mandate.
In what was by far the 2021 proxy season’s most high-profile contest, Engine No. 1 succeeded in electing three directors to Exxon Mobil’s board. This Alliance Advisors article asks whether this proxy fight was a bellwether of future contests. After providing a detailed blow-by-blow of the contest, Alliance offers up the following conclusion:
We believe the Exxon fight is a bellwether in at least two ways. First, there is little doubt that Engine No. 1’s victory in the Exxon proxy fight will embolden other investors to launch board contests in the future that focus on E&S issues. Second, and perhaps more important, companies should pay close attention to the ETF (The Engine No. 1 Transform 500 ETF) that Engine No. 1 recently established.
There is a reason Engine No. 1 chose the ticker symbol VOTE. With this ETF, Engine No. 1 has staked out new ground. Rather than exclude companies from its impact fund that may not meet ESG thresholds, Engine No. 1 will include them and use its vote to “[s]trategically hold companies and leadership teams accountable while focusing on environmental, social, and governance issues that create value.”
The article notes that Engine No. 1’s approach aligns with that of the major index funds, which hold shares based on broad indexes and are increasingly using their votes to promote change.
A few months ago, I blogged about the Chancery Court’s decision in In re Appraisal of Regal Entertainment Group, (Del. Ch.; 5/21). In that case, the Court held that the appraisal statute required a fair value award to take into account changes in the target’s value between the signing & closing of a merger. According to this Cooley blog, the decision has the potential to rejuvenate the appraisal arbitrage game, which has been in steep decline following a series of Delaware Supreme Court decisions. Here’s an excerpt:
Parties should be mindful of the potential impact of Regal in transactions with delayed closings (particularly those with more significant gaps between signing and closing), as it provides a roadmap for would-be appraisal arbitragers to potentially capitalize on increases in target’s value between signing and closing. Buyers should keep a detailed record of any internal discussions and deliberations regarding deal price, and carefully document the type and amount of expected synergies reflected in the deal price, as synergy reductions will help to counteract any upward adjustment for increases in value.
The blog says that it appears unlikely that Regal result in appraisal arbitrage returning to pre DFC Global, Dell & Aruba levels. That’s because petitioners will have to establish that the target’s value increased (and the amount of the increase) between signing and closing – and any such increase would have to outweigh any reduction for synergies in order for the fair value to rise above the deal price.
This Lazard report reviews shareholder activism during the first half of 2021. Here are some of the highlights:
– 94 new campaigns were initiated globally in the first half of 2021, in line with 2020 levels. Year-over-year stability buoyed by a strong Q1, with Q2’s new campaigns launched (39) and capital deployed ($9.1bn) below multi-year averages.
– The first half of 2021 was distinguished by several high-profile activist successes at global mega-cap companies, including ExxonMobil (Engine No. 1), Danone (Bluebell and Artisan Partners) and Toshiba (Effissimo, Farallon, et al.)
– U.S. share of global activity (59% of all campaigns) remains elevated relative to 2020 levels (44% of all campaigns) and in line with historical levels. The 55 U.S. campaigns initiated in the first half of 2021 represent a 31% increase over the prior-year period.
– 44% of all activist campaigns in H1 2021 featured an M&A-related thesis, in line with the multi-year average of 40%. Among all global M&A-focused campaigns in H1 2021, 56% centered on scuttling or sweetening an announced transaction (and accounted for all European M&A-focused campaigns). In contrast, campaigns pushing for an outright sale of the company accounted for only 12% of M&A-related campaigns in the first half of 2021, below the multi-year average of 34%.
The report also notes that investor support for ESG campaigns reached an all-time high, with14% of all proposals passed in H1 2021, up from a three-year average of 6%, and that short activism targeting de-SPACed companies has emerged as an increased threat in H1 2021, with prominent short sellers, such as Hindenburg Research, attacking high-profile de-SPACs such as DraftKings, Lordstown Motors and Clover Health.
SPAC buyers have typically looked to the common equity PIPEs for funding to support de-SPAC transactions. But in recent months, that market has tightened, and some SPACs have opted for alternative financing structures. This Freshfields blog reviews recent de-SPACs in which alternative financing structures have been used, and describes the terms of those financings. This excerpt provides an overview of the alternative arrangements that have been used in recent deals:
Over the past few months, with the PIPE market becoming tighter but with 400 SPACs still seeking targets for business combinations, we have been seeing some de-SPAC deals being announced with alternative and even creative financing structures. Some SPACs have raised funds through the issuance of convertible debt or preferred stock, providing investors with fixed returns with additional upside through the convert features.
Others have utilized common equity PIPEs but also included warrants together with a lockup on the shares and warrants – again to increase potential PIPE return. Some deals have included sponsor and other backstops to cover potential shareholder redemptions, thus reducing execution uncertainty. In some cases there has been no PIPE or other financing at all.
There’s another tidbit in the blog that I’d like to highlight. Not too long ago, I received a question about whether there was any reason that common equity PIPEs had to be priced at the $10.00 SPAC IPO price. I said that I didn’t think there was, but I also didn’t know of any examples where the PIPE was priced below $10.00. Thanks to the blog, I do now:
Almost every common equity PIPE is sold at $10.00 a share – the same as the SPAC’s IPO price and close to the anticipated trust value of the shares in the event of redemptions. However, another way to improve the economics for PIPE investors is to sell them discounted shares. In the DPCM Capital, Inc. / Jam City, Inc. business combination, announced on May 19, 2021, the SPAC obtained commitments from PIPE investors to purchase 11,876,485 shares of SPAC common stock for approximately $100,000,000. This translates into a heavily discounted price of $8.42 per share.