In Houseman v. Sagerman, (Del. Ch. 7/21), the Delaware Chancery Court held that a merger agreement’s indemnification provisions were binding on the seller’s non-signatory stockholders. Unlike the situation addressed in Cigna v. Audax, (Del. Ch. 11/14), the indemnification provisions here were capped at the amount of the escrow account. While that avoided Audax’s Section 251(b) issue, Steve Quinlivan’s blog on the case discusses how the Court dealt with the issue of binding non-signatories. As this excerpt explains, that turned on the Court’s interpretation of the authority of the Shareholders’ Representative:
The Court found that even though the Shareholders’ Representative was appointed by the Owners, and not all shareholders, that did not limit the ability of the Shareholder Representative to act on behalf of the other shareholders. The Merger Agreement provided that “[t]he Owners hereby appoint Thomas D. Whittington (the “Shareholders’ Representative”) as their attorney-in-fact with full power . . . to perform any and all acts necessary or appropriate in connection with the Agreement.” The Merger Agreement further provided that the actions of the Shareholders’ Representative “shall be binding upon all of the Owners and Shareholders.”
In the view of the Court, the actions of a stockholders’ representative are generally binding on all stockholders. Looking to prior precedent, the Court noted that all Section 251 of the DGCL required was for the representative to be designated as the individual who would follow the procedures and make or participate in the determinations called for by the Merger Agreement. In this case the Merger Agreement designated the Shareholders’ Representative to carry out the actions contemplated by that Agreement. Therefore, the Shareholders, whether signatories or not, were bound by the actions and determinations of the Shareholders’ Representative to the extent they are in accordance with the Merger Agreement’s terms.
According to a recent CFO Dive article, the high volume of M&A activity has made it increasingly difficult for deals that don’t fit easily within carriers’ comfort zones to find RWI coverage. Here’s an excerpt:
CFOs whose companies are considering an acquisition could struggle to get representations and warranties insurance unless the deal falls neatly into carriers’ comfort zones, insurance specialists said in a Dechert LLP webcast.
Since the end of last year, mergers and acquisitions have been exploding, creating a bandwidth problem at insurance carriers as they try to keep up. As a result, insurers aren’t hesitating to turn down deals.
“Carriers across the board right now are inundated with deals and requests to quote deals and as a result they can be, and are being, highly particular with the deals they choose to actually underwrite,” said Emily Standen, senior vice president of insurance broker Marsh JLT Specialty.
The article says that small deals, complex deals, deals with tight timetables and those involving unfavored industry sectors are facing challenges in finding coverage. What’s more, if you do find coverage, you’re likely to find that premiums are higher & coverage terms tighter than they’ve been in the past.
This recent memo from Hunton Andrews Kurth’s Steve Haas discusses the lessons learned from the last year’s worth of pandemic-related M&A litigation. Steve says there are two broad categories of lessons to be learned from these lawsuits. The first category deals with the specific allocation of pandemic-related risks in purchase agreements, such as whether the effects of pandemics are excluded from the MAE definition and the extent to which the target can take actions between signing & closing without violating interim operating covenants.
Steve suggests that these lessons will become less important as the pandemic fades, but that a second category of lessons – those that arise from pandemic-era judicial interpretations of deal terms in use prior to the pandemic – will have a more lasting impact. This excerpt says that these lessons include:
– reaffirming the high threshold necessary to show an MAE has occurred under Delaware law;
– whether parties want to be more specific in referencing the peer group for determining whether a target has been disproportionately impacted by external changes or events relative to its peers;
– negotiating ordinary course covenants, including whether the obligation to operate in the ordinary course is absolute, qualified by an “efforts” standard, or subject to other exceptions; whether “ordinary course” is based only on the target’s prior performance or can also be based on what similarly situated companies do; and the extent to which a buyer is entitled to withhold its consent from the target’s request to deviate from its covenants; and
– the possibility that sellers may be able to obtain specific performance against private equity buyers even when the parties have used the typical financial sponsor construct in which specific performance is conditioned on the funding of the debt financing.
It’s fairly standard for shareholders agreements to include a “lockup” provision obligating a shareholder to refrain from selling shares for a period of time following an initial public offering of the company’s shares. Other rights and obligations under these contracts are sometimes triggered by an initial public offering as well. But what happens when the initial public offering isn’t a traditional IPO, but a de-SPAC merger?
There are a couple of interesting pieces of litigation rattling around in Delaware that address interpretive issues about whether contractual provisions designed to address a traditional IPO also cover a de-SPAC. This excerpt from a recent blog by Ann Lipton explains what’s at issue in the two cases:
In two cases pending in Delaware Chancery, investors in private companies slated for a SPAC merger are arguing that their shareholder agreements impose certain obligations on them in the event of a traditional IPO, but impose no obligations in the event that a company goes public via SPAC.
In the first, Brown v. Matterportet al., 2021-0595, the plaintiff is the former CEO. He claims that he agreed to a lockup for his shares in the event of an underwritten IPO, but that no such restriction attaches for a de-SPAC transaction – and that Matterport is improperly trying to bind him to a lockup via the merged company’s bylaws.
In the second, Pine Brook Capital Partners v. Better Holdco et al., 2021-0649, a venture capital firm claims that its shareholder agreement only gives the company redemption rights for some of its shares in the event of an underwritten IPO – not a de-SPAC transaction. (The firm also claims that the company is improperly requiring that larger shareholders – including itself – agree to a lockup as a condition to receiving merger consideration; the complaint does not specify whether its shareholder agreement provides for a lockup in the event of an IPO.)
Ann’s blog points out that the shareholders agreements at issue were entered into before the SPAC market exploded, and their language didn’t specifically address the possibility of going public via a de-SPAC deal. That means it’s time for the Chancery Court to put on its thinking cap.
This Debevoise publication provides an overview of the various EU & US regulatory factors and other considerations that are helping to make ESG issues front and center in many M&A transactions. This excerpt focuses on ESG metrics and their use in the due diligence process:
When conducting ESG due diligence in an M&A context, it is important to understand how the buyer intends to account for and potentially disclose ESG information. For example, diligence conducted for an impact-focused fund will likely serve as the baseline from which the fund will measure and report ESG changes during its period of ownership. Similarly, a social impact fund aimed at improving financial inclusion will want to know the number of “unbanked” people currently served by a target company so that it can measure the shift in access to financial services during the life of its investment.
As another example, a large public company that reports on ESG matters under the Sustainability Accounts Standards Board (the “SASB”) standard will want to understand the pro forma effect of a potential acquisition on its ESG reporting. This is no different in concept to understanding the accounting framework used by the buyer when conducting accounting and financial due diligence.
As discussed above, some regulators have mandated ESG-related reporting on specific matters, such as supply chain or climate risks. Beyond those legally mandated, various systems of ESG reporting standards have arisen over the last few years. Notable examples are the SASB and the Global Reporting Initiative (the “GRI”). SASB’s set of 77 Industry Standards identifies “the minimal set of financially material sustainability topics and their associated metrics for the typical company by an industry”. The GRI Standards are divided by topic: the three universal Standards are used by every organisation that prepares a sustainability report; and the remainder are chosen by an organisation from topic-specific Standards.
The publication also addresses new ESG diligence requirements in selected EU markets & in the U.S., highlights certain risk management concerns, and addresses the potential benefits for businesses of robust ESG diligence.
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.