Yesterday, the FTC & DOJ announced that the agencies “will be reviewing the processes and procedures used to grant early termination to filings made under the Hart-Scott-Rodino Act.” While it’s unknown what the long term results of that review may be, one immediate result is that the agencies will not grant early terminations for an unspecified period. Here’s an excerpt from the FTC’s announcement:
For this period, the agencies will not grant early terminations. We anticipate that this temporary suspension will be brief. The agencies implemented a similar temporary suspension of early termination grants in March 2020, following the Premerger Notification Office’s establishment of its e-filing system.
“We, as an agency and a country, are in unprecedented times, and our obligation is to be responsive to these circumstances, in this case by temporarily suspending early termination,” said Rebecca Kelly Slaughter, Acting Chairwoman of the Federal Trade Commission. “The law provides 30 days for the agencies to review the competitive implications of transactions. Given the confluence of an historically unprecedented volume of filings during a leadership transition amid a pandemic, we will presume we need those 30 days to ensure we are doing right by competition and consumers.”
“We support the FTC’s decision to temporarily suspend early termination grants to ensure appropriate review of transactions during this challenging transition period,” said Richard A. Powers, Deputy Assistant Attorney General and Senior Supervisory Official of the Department of Justice’s Antitrust Division.
Not everyone was on board with this decision. The two Republican FTC commissioners issued a statement objecting to the decision to suspend early termination grants, contending that “absent exigent circumstances, an indefinite suspension of the ET process—with no clarity regarding when and under what circumstances it will resume—is unwarranted.”
The announcement coincides with Sen. Amy Klobuchar’s (D – MN) introduction of sweeping antitrust reform legislation. Among other things, the legislation – which may garner some bipartisan support – would make it more difficult for big deals (particularly tech deals) to obtain antitrust clearance. This excerpt from a recent article in “The Hill” explains:
The first proposal of the lengthy legislation is focused on making anticompetitive mergers more difficult by amending the Clayton Act. It would add a risk-based standard to the foundational antitrust law and clarify that mergers that create a monopsony violate it. The bill introduced by Klobuchar, the top Democrat on the Senate Judiciary subcommittee on antitrust, would also seek to shift the burden to parties seeking a merger to prove that they would not create a risk of lessening competition.
The legislation lists out several categories of mergers that would pose such a risk, including acquisitions by a dominant firm with 50 percent market share, acquisitions of disruptive firms by competitors and mega-merger transactions valued at $5 billion or more.
The timing of the FTC & DOJ’s announcement and the introduction of Sen. Klobuchar’s legislation appears to be coincidental, but both actions send the message that a lot of things that have long been taken for granted when it comes to M&A antitrust review are now being looked at with a fresh set of eyes.
Demands from investors and other stakeholders for companies increase to increase their focus on ESG issues have grown exponentially in recent years. While most of the attention has been focused on various ESG metrics and disclosures, a recent Wachtell memo on M&A in 2021 devotes a section to ESG – and suggests we’ve reached an inflection point when it comes to ESG & M&A. Here’s an excerpt:
ESG has reached an inflection point, with boards of directors, investors and other market participants and observers focusing on questions regarding corporate purpose and recognizing the critical importance of environmental, social and governance factors in the sustainability and long-term
value creation potential of the corporation and, ultimately, broader economic prosperity. As ESG is increasingly incorporated into strategic and operational decision-making, it will likely become increasingly salient in the context of mergers and acquisitions.
For example, as investor focus, and corporate accountability, around ESG metrics continue to increase, those metrics are likely to play a more important role in pre-signing due diligence and the assessment of the pro forma impact of a potential M&A transaction. With growing attention to the importance of human
capital to the success of the firm (including the SEC’s amendment to Regulation SK requiring companies to describe their human capital resources), deal-related synergies that are tied to workforce changes may face increased scrutiny, particularly for companies that have received government assistance during the pandemic.
Meanwhile, companies seeking to enhance the sustainability of their businesses, for example by switching to cleaner technologies or improving product safety, may find that ESG factors drive their acquisition or disposition strategies. In addition, ESG-related elements of the deal story may feature more prominently in transaction announcements and roll-outs, alongside traditional talking points like economic synergies, in the years to come.
As an example of a deal’s ESG elements featuring more prominently in announcements & rollouts, the memo cites the way that ConocoPhillips & Concho highlighted the combined entity’s status as the first U.S. based oil & gas company to adopt a Paris-aligned climate risk strategy.
Bloomberg published an interesting opinion piece by Chris Bryant that suggests the SPAC boom may be driven by the fact that, unlike traditional IPOs, sponsors of a de-SPAC merger transaction can discuss projections under the protection of the PSLRA’s safe harbor for forward-looking statements. Here’s the intro:
Former Facebook Inc. executive Chamath Palihapitiya is very open about why he’s such a fan of special purpose acquisition companies (SPACs), compared with taking a company public the usual way.
“In a traditional IPO you can’t show a [financial] forecast and you can’t talk about the future of how you want to do things, you’re just not allowed,” he said in a recent interview. He was referring to laws that exclude initial public offerings from so-called “safe harbor” protections covering forward-looking corporate statements. “Because the SPAC is a merger of companies, you’re all of a sudden allowed to talk about the future,” he told another YouTube questioner. “When you do that you have a better chance of being more fully valued.”
I have a feeling we’ll likely find out fairly soon just how much protection courts are willing to say the safe harbor provides to de-SPAC transactions. SPAC sponsors face an increasing risk of litigation surrounding de-SPAC transactions. Several of the lawsuits that have been filed so far have challenged optimistic statements about the target’s future performance, and recent case law suggests that courts can be pretty resourceful when it comes to finding ways around the safe harbor.
The FTC’s announcement of the new HSR thresholds beat Groundhog Day this year. Of course, that means that we at DealLawyers.com are getting a jump on our own harbinger of spring – the annual inundation of law firm memos about the new HSR filing thresholds. This year’s winner of the annual “first memo in my inbox” contest is Greenberg Traurig. Here’s an excerpt from their memo with the details on the new HSR thresholds, which actually declined this year:
The initial threshold for a notification under the HSR Act will decrease from $94 million to $92 million. For transactions valued between $92 million and $368 million (lowered from $376 million), the size of the person test will continue to apply. That test will now make the transaction reportable only where one party has sales or assets of at least $184 million (lowered from $188 million), and the other party has sales or assets of at least $18.4 million (lowered from $18.8 million). All transactions valued in excess of $368 million are reportable without regard to the size of the parties. The new thresholds will apply to any transaction that will close on or after March 4, 2021.
The thresholds for Section 8 of the Clayton Act’s prohibition on interlocking directorates were also lowered this year & are effective as of January 21, 2021:
Section 8 prohibits a “person,” which can include a corporation and its representatives, from serving as a director or officer of two “competing” corporations, unless one of the following exemptions applies:
– either corporation has capital, surplus, and undivided profits of less than $37,382,000 (lowered from $38,204,000);
– the competitive sales of either corporation are less than $3,738,200 (lowered from $3,820,400);
– the competitive sales of either corporation amount to less than 2% of that corporation’s total sales; or
– the competitive sales of each corporation amount to less than 4% of each corporation’s total sales.
Changes in the HSR & Clayton Act thresholds are based on changes in GDP. The memo points out that this is the only the second time since Congress amended the HSR Act in 2000 to require the annual adjustment of notification thresholds. The last time a downward adjustment was made occurred in 2010.
In Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, (Del. Super. 1/21), the Delaware Superior Court rejected efforts by a seller’s managers to dismiss the buyer’s fraud claims against them – despite the seller’s efforts to limit liability through exclusive remedy & non-recourse provisions in the purchase agreement. In a recent blog about the decision, Weil’s Glenn West points out that the absence of a non-reliance provision played a key role in the outcome – and that all three provisions are necessary to mitigate the risk of fraud claims.
The buyer’s fraud claims against the seller’s managers were aided by the language of the fraud carve-out itself. The carve-out to the agreement’s exclusive remedy provision didn’t limit the sources of alleged misrepresentations that could serve as the basis for a fraud claim, and applied not just to fraud by one of the parties to the deal, but by any person – including specifically “an officer or manager of any Seller or Buyer in connection with the consummation of the transactions contemplated by this Agreement.”
Despite the language of the fraud carve-out, the seller pointed to the provisions of the non-recourse clause – which contained no such carve-out – and said that the buyers were to have no recourse to the seller’s managers for any claims arising under or related to the purchase agreement. They contended that this language trumped the fraud carve-out to the deal’s exclusive remedy clause.
As this excerpt from the blog explains, not only did the court not buy that argument, it said there was nothing that the parties could do by contract to insulate anyone from intentional fraud claims:
The human manager defendants asserted that the nonrecourse clause trumped the exclusive remedy clause’s Fraud carve-out. Not so said the court—the exclusive remedy provision stated that “nothing herein shall … preclude any party from seeking any remedy against any Person based upon Fraud by any other Party.” And according to the court, the “herein” referred to was the entire APA, not just the exclusive remedy provision itself; thus, the exclusive remedy provision’s Fraud carve-out trumped the non-recourse provision: “while the parties generally agreed the No Recourse Provision would bar ‘tort’ claims against the Managers, they also expressly agreed the APA would not bar the bringing of fraud claims.”
But importantly for our purposes, the court went further and stated that the parties “could not have contacted otherwise … [because] Delaware courts refuse to enforce contracts purporting to condone—or at least insulate—intentional fraud.” The court thus suggested that, even if the exclusive remedy provision’s fraud carve-out had not been deemed to have trumped the nonrecourse clause’s bar on tort claims against nonparty human agents of the entity parties, an intentional fraud claim could still have been brought against the human managers of the selling entity party to the APA based on Delaware public policy.
The blog says that this result shouldn’t come as a surprise to anyone familiar with the Chancery Court’s decision in Abry Partners, and points out that in Delaware, the one fraud claim that an exclusive remedy provision can’t be drafted to eliminate “the [s]eller’s exposure for its own conscious participation in the communication of lies to the [b]uyer” in the written agreement itself. The blog points out that the asset purchase agreement in this case lacked an important third leg necessary to maximize the protection available to individuals – a non-reliance provision:
Unlike exclusive remedy provisions and nonrecourse clauses, there do not appear to be any Delaware public policy exceptions to the effectiveness of a well-crafted and properly placed non-reliance clause. There was no non-reliance clause in the APA being considered in Surf’s Up Legacy Partners; thus both extra-contractual and intra-contractual fraud claims were at play.
In order to effectively mitigate the risk of “untethered fraud claims,” the blog says that all three of these provisions “need to work together against knowledge of the public policy restrictions on their full effectiveness.”
This Grant Thornton report looks at some of the leading causes of post-closing disputes in M&A transactions and provides insight into how to prevent them. The report surveyed deal professionals & found that the top areas of post-closing disputes were working capital adjustments, earnouts, and debt price adjustments.
According to the report, using a locked box mechanism was the most frequently cited method of avoiding post-closing disputes. This excerpt describes a typical locked box arrangement & how it contrasts with the typical approach to establishing the total consideration payable in U.S. deals:
The traditional approach to establishing the total consideration for a deal is to measure cash, debt and working capital as of the closing date. This ensures that the balances are accurate as of that date, but it cannot be done until after closing – and sometimes this can be a lengthy process, particularly when
disputes arise.
Difficulties can occur when the preparer discovers balance sheet items that had previously not been discussed or considered, undisclosed or unidentified liabilities, or the valuation of assets may be called into question – and parties need to work together to derive the equity value adjustments. As the locked box mechanism (LBM) measures cash, debt and working capital at a historic balance sheet date, the parties have full clarity on the purchase price adjustments prior to signing the deal. Parties can even agree on these terms prior to signing exclusivity, perhaps including a locked box purchase price bridge at the Letter of Intent stage.
The purchase price adjustments are “locked in” as of an effective date and the parties mitigate the need to recalculate these post-closing. By omitting a post-close adjustment, the parties can alleviate the risk of post-close disputes arising. The date of the locked box balance sheet used to derive the price adjustments must be carefully considered. Sufficient time will be necessary to prepare an accurate set of accounts, but this should not be so long that it no longer accurately represents the business, and there is an increased risk of leakage during the period to closing. If timing permits, it can be advantageous to use an audited set of financials, though this is not necessary.
The seller will typically provide a warranty to the buyer as to the accuracy of the locked box balance sheets. If the locked box is subsequently found to be inaccurate, the buyer may be able to make a warranty claim for losses suffered as a result. While this may not offer the same level of protection as the closing balance sheet process, there are typically fewer disputes around this when compared to the traditional method.
The report acknowledges that many US dealmakers are not familiar with locked box mechanisms, but says that when used effectively, they provide a number of benefits not found in the traditional closing balance sheet approach. These include avoiding the need to prepare, review and fight about the closing balance sheet, permitting buyers to focus on post-closing integration & operations of the business, and allowing sellers to receive full payment at closing.
This Sullivan & Cromwell memo takes a look at 2020’s activist campaigns & settlement agreements. Contrary to initial expectations, market volatility resulting from the onset of the pandemic didn’t lead to higher levels of activism. Instead, activist campaigns declined by nearly 1/3rd through the first eight months of 2020. But down doesn’t mean out – and as this excerpt points out, 2020 saw some new approaches by activists that may have important implications in 2021 & beyond:
As the pandemic depressed M&A activity and created an increased focus on liquidity in the spring and early summer, activism campaigns with M&A and capital allocation theses decreased, with activists increasingly focusing on board and management changes and operational improvements instead. In addition, we began to see more examples of activists mentioning environmental, social and political (ESP) themes in their campaigns, after years of speculation that this trend would emerge as activists fight to win over institutional shareholders.
The strategies deployed by activists are also changing, including through an increased focus on short strategies, highlighted by Hindenburg’s campaign at electric truck maker Nikola. We are also continuing to see a blurring of the lines between activists and other investors, as activists increasingly adopt private equity and special purpose acquisition company (SPAC) strategies and private equity funds and other investors foray into activism.
With the improved economic outlook after vaccinations have been sufficiently rolled-out & the potential pent-up demand resulting from the decline in activity last year, the 2021 proxy season could be a robust one for new activist campaigns.
In recent years, many companies have added so-called “wolf pack” provisions to their poison pills. This language is intended to ensure that the pill’s triggering thresholds address the ownership interests of multiple stockholders who, without expressly agreeing to act together, are nevertheless acting in concert. While wolf pack provisions are common in modern pills, these terms still must pass muster under the Unocal standard. A recent Chancery Court transcript ruling suggests that this may present more of a challenge than companies might expect.
This Richards Layton memo discusses the Chancery Court’s transcript ruling in In re Versum Materials, Inc. Stockholder Litigation, (Del. Ch.; 7/20) (transcript). The case involved a plaintiff’s application for a mootness fee for its role in causing Versum to eliminate a wolf pack provision & terminate a rights plan originally implemented to protect a merger of equals transaction with Entegris.
The company subsequently terminated the Entegris deal and agreed to be acquired by Merck at a higher price. This excerpt from the memo notes that in ruling on the mootness fee, the Chancery Court appeared somewhat dubious about whether wolf pack provisions could withstand Unocal scrutiny:
In its ruling on the mootness fee, the court noted that wolf pack provisions can be used to limit creeping takeovers and potential wolf pack activity by hedge funds. But in discussing the rights plan in light of Unocal’s reasonableness prong, the court noted that the evidence of such wolf pack activity in this case was “quite skimpy.”
Further, in discussing the rights plan in light of Unocal’s proportionality prong, the court indicated that Versum’s wolf pack provision was “an expansive provision that [went] beyond traditional concepts of beneficial ownership to include … any type of parallel action in the context of a control contest, regardless of the existence of any type of arrangement, agreement, or understanding, and with the indicative events being, really, customary activities, such as exchanging information, attending meetings, or conducting discussions,” and that Merck’s actions in connection with its bid, such as “roadshows, solicitation calls, [and] meetings with stockholders,” could have been deterred by the wolf pack provision.
Additionally, the court noted that the wolf pack provision was asymmetric because it carved out from its scope Entegris and the Versum-Entegris merger such that Entegris was not similarly constrained by the provision. Although Merck submitted an affidavit stating that it did not view the wolf pack provision or the rights plan as an impediment to its topping bid, the court ultimately concluded that the plaintiffs’ actions conferred material benefits on Versum’s stockholders and awarded the plaintiffs $12 million in fees.
The memo points out that the circumstances of this case were somewhat unusual, in that it involved a rights plan that was adopted to protect a deal that was successfully jumped by another bidder. That set of facts made the plaintiff’s mootness fee claim fairly attractive. But the memo also notes that wolf pack provisions have been challenged in a number of other cases dealing with Covid-19-related pill adoptions, and cautions that boards need to take appropriate steps before implementing a plan with such a provision in order to maximize its chance of satisfying enhanced scrutiny under Unocal.
The Versum Materials case was decided in a transcript ruling, which raises another question – just how much should this decision or any other transcript ruling be relied upon as precedent? This Prof. Bainbridge blog flags a recent article addressing that topic.
Anne Lipton has an interesting blog that addresses the lengths to which judges will go to avoid providing liability protection to projections that look to be. . . well . . . a little on the “shady” side. She focuses on two recent cases involving alleged “lowballing” of a seller’s projections in order to make a deal appear more favorable – the Chancery Court’s decision in In re Mindbody Securities Litigation, (SDNY 9/20), and a California federal court’s decision in Karri v. Oclaro, (ND Cal.; 10/20).
The court wouldn’t allow a straight-up projections claim to proceed [in Mindbody], but it did hold that the proxy materials contained an “actionable omission because Defendants’ statements about Vista’s 68% ‘premium’ implied that Mindbody had no non-public information that would materially affect its share price…. Here, the 68% measuring stick would only have been informative to shareholders if the Defendants believed that the December share price was an accurate reference point. By invoking the ratio of Mindbody’s share price to Vista’s offer, Defendants impliedly warranted that, to their knowledge, the share price as of December 21, 2018, was not undervalued.”
Get it? The court wouldn’t allow a lawsuit based on the false projections themselves – and didn’t want to just come right out and say there was a duty to update the false guidance (indeed, it denied so holding) – so, it threaded the needle by treating references to a premium as their own, present-tense half-truths about the true value of the stock.
But that’s nothing compared to the contortions in Oclaro. There, again, plaintiffs alleged that defendants lowballed projections in order to drive the stock down, thus justifying the merger. There, again, the court held that false projections were protected by the PSLRA safe harbor. But what wasn’t protected were valuation estimates derived from the projections, or representations about how the projections were prepared, including representations that they were prepared in good faith, and those claims were allowed to proceed.
Now, defining “forward-looking” has always been something of a challenge in securities cases, but saying the projection is protected by the safe harbor but the valuation based on that projection is not protected is some next-level hairsplitting.
These decisions illustrate that there are all sorts of semantic gymnastics available to a court that wants to avoid applying the PSLRA safe harbor or state law limitations on liability for forward-looking statements to projections that it views with suspicion. So, maybe the best way to reduce the risk of liability for projections is to be careful not to put yourself in a position where the plaintiff can argue that you viewed the safe harbor as a “license to lie.”
Financing markets nearly shut down when the pandemic hit, but in contrast to the experience following the onset of the 2008 financial crisis, they didn’t stay that way for long. This Wachtell memo reviews the acquisition finance market during 2020 and raises some issues that will be on the radar screen in 2021. Here’s the intro:
The Covid pandemic and fears of a global recession roiled financial markets around the world in March and April: U.S. investment grade risk premiums reached their highest levels since the Great Recession and investment grade bond and commercial paper markets briefly froze; the leveraged loan and high-yield bond markets seized shut; and the amount of U.S. distressed debt (bonds yielding at least 1,000 basis points more than treasuries and loans trading for less than 80 cents on the dollar) ballooned to nearly $1 trillion.
Unlike in the Great Recession, global financial markets quickly stabilized, and markets and banks proved to be a source of strength for large and mid-sized companies of all credit profiles. Companies moved quickly to stockpile liquidity (first by drawing existing lines of credit and then by exploring more creative options) and secure temporary covenant relief. Some companies, such as Expedia and Gap, fully reconfigured their capital structures, moving swiftly and nimbly to strengthen their balance sheets and ride out the storm. Government stimulus programs and central bank activity—including the Federal Reserve’s cut in interest rates to zero and intervention directly in credit markets by buying corporate debt and ETFs—buoyed markets and set the stage for this binge on new borrowings.
By December, the script had reversed: investment grade spreads neared record tight levels; CCC-rated bonds reached their lowest yields in more than five years; and the amount of U.S. distressed debt fell below pre-Covid levels to $184 billion. High-yield bond volumes reached their highest December level since 2006.
While 2020 ended on a positive note, the memo highlights a number of concerns that cloud the outlook for 2021. These concerns include whether companies have a liquidity cushion sufficient to handle a resurgent pandemic; the consequences of the expiration of temporary covenant relief provided by lenders starts; and when & how companies will address the enormous increase in corporate leverage.
The memo goes on to address some of 2020’s lessons, including the need to be ready to move quickly when financing windows open, the need for buyers & sellers to pay close attention to issues surrounding financing certainty, and the importance of strategies designed to thwart debt default activism. The memo also lays out a number of acquisition financing issues to monitor in 2021, including the risks of convertible debt, the implications of the imminent LIBOR transition and the growing role of ESG considerations in credit assessments.