I’ve previously blogged about navigating the consent requirements applicable to M&A transactions involving PPP borrower targets. Last Friday, the SBA issued guidance clarifying whether SBA consent is required for a proposed change in ownership of a PPP borrower. This McGuire Woods memo reviews the guidance, and this excerpt summarizes what transactions involve a “change in ownership”:
One of the uncertainties causing difficulty in administering change in ownership requests to date has been ascertaining what sort of transactions require SBA consent. As a first step, the procedural notice establishes that a “change of ownership” under the PPP would arise upon the occurrence of any the following circumstances:
– Equity acquisitions: A change of ownership would occur upon the sale or transfer of 20 percent or more of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity), including sales and transfers to existing owners or affiliates, as determined by aggregating all such sales or transfers that have taken place since the PPP loan was approved by SBA; provided that, with respect to public companies that are PPP borrowers, “only sales or other transfers that result in one person or entity holding or owning at least 20 [percent] of the common stock or other ownership interest of the borrower must be aggregated”;
– Asset sales: A change of ownership would occur upon the sale or other transfer of at least 50 percent of a PPP borrower’s assets (measured by fair market value), whether in one or more transactions; or
– Merger: A change of ownership would occur if a PPP borrower is merged with or into another entity.
Any transaction that does not satisfy one of the change of ownership descriptions above does not constitute a change in ownership subject to determination of whether SBA consent is required under the procedural notice. The SBA’s guidance does not address questions relating to whether certain indirect changes in ownership, such as a change in control of a parent entity, require SBA consent.
The memo also points out that even if a transaction does not require SBA consent, there are certain general notice requirements that apply “for all sales or other transfers of common stock or other ownership interest or mergers, whether or not the sale requires SBA’s prior approval.”
The guidance also enumerates certain change in ownership transactions that won’t require SBA consent. As discussed in more detail in the memo, these include certain transactions in which the PPP loan will be paid off in full prior to closing, transactions involving a sale or transfer of 50% or less of the borrower’s common equity or other ownership interests, and other dispositions or mergers pending forgiveness that are accompanied by an escrow for the outstanding balance of the PPP loan.
Tune in tomorrow for the webcast – “CFIUS After FIRRMA: Navigating the New Regime” – to hear Wilson Sonsini’s Stephen Heifetz and Hogan Lovells’ Anne Salladin discuss how to deal with the enhanced national security review environment resulting from implementation of 2019’s Foreign Investment Risk Review Modernization Act.
In the early days of the pandemic, it seemed that activism & hostile activity took a bit of a holiday. Market volatility made activists unwilling to commit to long-term hold positions, and the valuation hits that many companies took led to greater investor support for defensive measures, such as short-term rights plans, designed to thwart opportunistic moves by activist hedge funds or potential acquirors. That was then, but according to this Sidley memo, this is now:
Activists and potential suitors have returned. Many activists are building positions and are reaching out to the companies that are next on their current hit list. It is not necessarily the case that strong stock price performance protects you. Certain industries, such as many in the technology sector whose businesses are largely insulated from the most deleterious effects of a continued COVID-19 crisis, offer safe(r) haven to investors, including activists. Potential acquirors are similarly emerging in force.
The memo reviews how the environment has changed since the spring, and has some recommendations about preparations that should be made to address potential activism and hostile M&A in the Covid-19 era, including:
– Understand the attractiveness to an activist or potential acquirer of your business in the current environment. Has your stock price been disproportionately impacted versus your business? Has your stock performed reasonably well but the crisis changed the strategic appeal of the company to a potential suitor?
– Understand your governance vulnerabilities. Beyond understanding your business, strategic and financial vulnerabilities, what are possible attacks on your board, compensation, ESG and other governance issues? Has an activist law firm reviewed these issues from a proxy fight perspective?
The memo also recommends developing an activism response plan and assembling a team, having an up-to-date rights plan on the shelf, and reviewing corporate charter documents to ensure the company is adequately prepared to respond to evolving activist tactics.
Intralinks recently released its annual “M&A Leaks Report.” Once again, the report makes for interesting reading – it analyzes deal leaks over the period from 2009-2019, and breaks them down by world region, country & business sector. The report also looks into the effect of leaks on the premiums paid, emergence of rival bidders & time to closing. Here are some of the highlights:
– Globally, the rate of M&A deal leaks increased to 8.7 percent in 2019, the first rise in four years and the second-highest level of leaked deal activity since the start of Intralinks’ study in 2009.
– This increase was driven primarily by the EMEA region where the percentage of deals involving abnormally high levels of trading immediately pre-announcement increased by 75%t year on year, from 5.8% to 10.2% in 2019.
– The leakiest countries last year were South Korea, Germany and the U.K. Germany & the U.K.’s gabbiness explains why the EMEA region had the biggest relative share of leaks in 2019.
The leakiest industry sectors were were Energy & Power, Healthcare and Industrials, all of which saw an increase in their rate of leaked deals. The only other industry which upped its rate of leaks was TMT.
– The bottom three sectors for deal leaks were Real Estate, Materials and Retail. These bottom three industries all showed annual falls in their deal leak rates.
One recurring theme of the annual survey is that leaky deals have always exceeded their more stealthy counterparts when it comes to takeover premiums. From 2009-2018 the median takeover premium for leaked deals was 44% vs. 25% for non-leaked deals, a difference of approximately 19 percentage points. In 2019, the median takeover premium for targets in leaked deals was 48% compared with 23% for non-leaked deals, a gap of 25 percentage points. That gap was essentially the same as that experienced in 2018, where leaked deals had a median takeover premium of 45% and non-leaked deals had a medium premium of 20%.
As I read the Chancery Court’s recent decision in Pilot Air Freight v. Manna Freight Systems, (Del. Ch.; 9/20), I experienced a very strong feeling of deja vu. Maybe that’s because, for the third time in the past three months, the Court upheld a plaintiff’s efforts to plead around a contractual reliance disclaimer on the basis of a fraud claim tied to the language of the reps & warranties themselves.
That sense of deja vu became even stronger when I realized that this case, like the Swipe Acquisition case decided in August, involved alleged misrepresentations in a purchase agreement concerning customer relationships. One of the more remarkable aspects of this decision, however, is the way that the contractual fraud claim here permitted the plaintiff to dig itself out of a really deep hole that it dug for itself.
What do I mean by that? Well, the plaintiff didn’t file a lawsuit against the seller until after the 15 month survival period set forth in the asset purchase agreement had expired. In addition, the plaintiff had signed on to a very explicit and broad-based disclaimer of reliance on any reps not made in the purchase agreement.
Undeterred, the plaintiff threw everything at the defendant but the kitchen sink, in the hope that something would stick. It claimed claimed breach of various reps & warranties relating to customer and vendor relationships, asserted contractual rights to indemnity, alleged violations of the implied covenant of good faith and fair dealing, and threw in fraud claims for good measure.
It seems fair to say that Vice Chancellor Slights wasn’t impressed with the plaintiff’s efforts to overcome the formidable impediments to its contractual claims. In fact, he devoted 57 pages of his 65-page opinion to smacking down every theory of contractual liability advanced by the plaintiff.
But then he got to the fraud claim. Although fraud has to be pled with particularity, the Vice Chancellor provided some insight into the recent success – at the motion to dismiss stage – of fraud claims tied to the language of reps & warranties. The truth is that, in these cases, it’s usually not hard to satisfy that requirement:
To meet the particularity requirement, Rule 9(b) often will require a plaintiff making a fraud claim to allege: “the time, place, and contents of the false representation, the identity of the person(s) making the representation, and what he intended to obtain thereby.” “When a party sues based on a written contract, as [Pilot] has done here, it is relatively easy to plead a particularized claim of fraud.”
“The plaintiff can readily identify who made what representations where and when, because the specific representations appear in the contract. The plaintiff likewise can readily identify what the defendant gained, which was to induce the plaintiff to enter into the contract.” Given that state of mind and knowledge may be averred generally when pleading fraud, an allegation that a contractual representation is knowingly false typically will be deemed well pled (even if ultimately difficult to prove).
VC Slights walked through the specific language of each rep which the plaintiff alleged to have been fraudulent, and found that it had pled its claims with the requisite particularity. Like Vice Chancellor Fioravanti in Swipe Acquisition, he also brushed aside the defendant’s allegations that the plaintiff was merely “bootstrapping” its breach of contract claims into a fraud claim.
In doing so, he noted that a plaintiff will be regarded as having bootstrapped a fraud claim when it merely “tacked on conclusory allegations that the defendant made the contract knowing it would not or could not deliver on its promises.” He also laid out the factual circumstances that will lead a Delaware court to conclude that a fraud claim wasn’t bootstrapped:
As our law in this area has evolved, it is now clear that improper bootstrapping does not occur: (1) “where a plaintiff has made particularized allegations that a seller knew contractual representations were false or lied regarding the contractual representation,” (2) “where damages for plaintiff’s fraud claim may be different from plaintiff’s breach of contract claim,” (3) when the conduct occurs prior to the execution of the contract “and thus with the goal of inducing the plaintiff’s signature and willingness to close on the transaction” or (4) when the breach of contract claim is not well-pled such that there is no breach claim on which to “bootstrap” the fraud claim.
He ultimately concluded that the plaintiff’s fraud claim fell squarely within several of the enumerated “non-bootstrapping spaces,” and declined to dismiss the allegations. For more on this topic, check out this Francis Pileggi blog on the various issues involved in these recent decisions. His blog also includes a helpful compendium of other Delaware cases involving contractual fraud allegations and the relationship between those allegations and contractual non-reliance clauses.
At this point, it’s not exactly news that 2020 hasn’t been a great year for M&A – but there are signs that activity has been picking up over the past few months. According to a recent White & Case survey of 250 senior M&A executives, dealmakers are feeling a bit more optimistic about the coming months as well. Here are the key takeaways from the survey’s results::
– Executives expect M&A activity to rise in the next 12 months—but not to pre-crisis levels. Almost three quarters of executives expect their companies to do more deals in the next 12 months compared with the previous 12 months.
– Streamlining will stimulate dealmaking as businesses fight to survive. The short-term increase in M&A activity will likely be driven by companies’ efforts to trim down and focus on the core areas of their businesses.
– Internationally, US dealmakers are most interested in the UK and China, despite geopolitics. Executives identify the UK, China and Germany as markets where they see the strongest international opportunities.
– Stocks are overvalued—but executives think another crash is unlikely. Six out of ten executives believe the stock market is overvalued, but only 15% expect another stock market crash.
The bottom line seems to be that, whether they are focusing on survival or growth opportunities, many companies anticipate that M&A will be a “critical lever” for their efforts to recover from the current crisis. But the emphasis definitely appears to be on survival – with more than 75% of the survey respondents indicating that they expect their companies to be focusing on defensive moves, and only 21% positioning themselves for growth.
When Tiffany & Co. filed a lawsuit against LVMH seeking to stop the French luxury giant from backing out of its deal to acquire the company, LVMH declared that Tiffany’s claims were “unfounded” & promised a lawsuit of its own. On Monday, it made good on that promise and filed an answer & counterclaim in the Delaware Chancery Court.
While we haven’t yet been able to track down a copy of LVMH’s answer & counterclaim (update: thanks to an advisory board member & loyal reader, we have a copy now), the company issued this statement summarizing its position. Here’s an excerpt addressing its contentions that Tiffany suffered a MAE & breached its operating covenants:
– A Material Adverse Effect has occurred. The notable absence of a pandemic carveout in the definition of a Material Adverse Effect in the Tiffany Merger Agreement is clear. It was common before COVID-19 for transactions to contain a pandemic carveout. In the course of the negotiation, Tiffany sought and received carveouts for highly specific events, such as “cyberattacks”, the “Yellow Vest” movement and the “Hong-Kong Protests”. Yet Tiffany did not obtain a carveout for public health crises or pandemics. In contrast, hundreds of other merger agreements executed in the decade preceding the Merger Agreement contained express pandemic or epidemic carveouts. The pandemic, whose effects are devastating and lasting on Tiffany, has irrefutably caused a Material Adverse Effect. This clause alone would be enough to prevent the closing, but there are other arguments included below that reinforce LVMH’s position.
– Tiffany breached its covenants to operate in the Ordinary Course of Business and to preserve its business organizations substantially intact. Tiffany’s mismanagement of its business constitutes a blatant breach of its obligation to operate in the ordinary course. For instance, Tiffany paid the highest possible dividends while the company was burning cash and reporting losses. No other luxury company in the world did so during this crisis. There are many examples of mismanagement detailed in the filing, including slashing capital and marketing investments and taking on additional debt.
I’m not so sure that LVMH’s claim that pandemic carve-outs were “common” before the Covid-19 pandemic is on solid ground. They weren’t unheard of post-SARs, but we’ve seen anecdotal evidence that they appeared in only a small minority of deals involving U.S. targets prior to the current unpleasantness.
LVMH’s statement also says that the French government’s letter French government “directing” it to defer the closing of the deal “makes it impossible to close the transaction” before the drop dead date set forth in Section 9.2(a) of the Merger Agreement. However, that claim may have some baggage associated with it beyond the interpretive issue of whether that letter represents the kind of impediment that would permit LVMH to terminate the deal under the terms of the agreement.
Here’s why – the WSJ reported that LVMH sought the French government’s intervention to prevent the deal. LVMH denies that allegation, but according to the article, it was apparently made by “senior” French government officials. If LVMH did ask the French government to stop the deal, that might raise issues under Section 7.3(b) of the Merger Agreement, which obligates both parties to use their respective “reasonable best efforts” to take actions necessary to “consummate and make effective the transactions,” That obligation extends to efforts to obtain “all consents, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any Governmental Entity.”
Last week, Vice Chancellor Slights granted Tiffany’s motion to expedite the proceedings in the case, and set a trial date for January 5, 2021 – with apologies for ruining the holidays of the law firm associates involved in the case. Stay tuned.
This Cooley blog reviews the busted deal litigation that’s arisen following the onset of the pandemic. Among other things, the blog discusses the challenges that sellers face in seeking the Delaware Chancery Court to compel PE sponsored buyers to specifically perform their contractual obligations. As this excerpt highlights, the limited nature of the typical PE fund specific performance obligation & their dependence on financing commitments often puts sellers in a bind:
In virtually all transactions that require debt financing to fund a portion of the purchase price (and where the private equity sponsor is not providing a 100% equity backstop), specific performance of buyer’s obligation to close is only available as a remedy if the debt has been funded or would be funded if the sponsor’s equity is funded. In other words, the specific performance remedy is conditional, and neither buyer nor the sponsor can be forced to close without the debt financing. In the event of a legitimate financing failure, a seller’s sole remedy would be to terminate the purchase agreement and collect the negotiated reverse termination fee.
Consequently, as certain sponsor-backed buyers indicated an unwillingness to close pending transactions due to COVID-19, sellers in those transactions requested expedited proceedings in the Delaware Chancery Court, knowing that their chances of obtaining specific performance would be significantly reduced (if not impossible) if the original debt financing commitment expired prior to the specific performance trial. In at least two instances, despite establishing a colorable claim and showing sufficient possibility of threatened irreparable injury, those requests for expedition were denied.
In addition, merger agreements often provide that a PE sponsor’s equity commitment will immediately terminate if the seller brings any claims against it other than claims to enforce that commitment and the sponsor’s limited guarantee of the target’s performance. Termination of the equity commitment results in a failure of the conditions to the debt financing, which means that filing other claims against the sponsor may be fatal to any potential specific performance remedy.
The blog reviews recent Delaware cases addressing seller claims for specific performance and the challenges facing sellers in those situations. It also makes several recommendations for sellers to consider when negotiating deals with PE sponsored buyers, including pushing for a sponsor equity commitment equal to the full purchase price, negotiating higher reverse breakup fees, and requiring more extended financing commitments from the buyer’s lenders.
Earlier this month, the Treasury Dept. amended the rules governing CFIUS mandatory declarations. Here’s the intro from this Simpson Thacher memo:
On September 15, 2020, the Office of Investment Security of the U.S. Department of the Treasury published a final rule modifying the Committee on Foreign Investment in the United States’ regulations relating to its mandatory declaration provisions. The most significant amendments pertain to the mandatory filing requirements for certain foreign investments in U.S. businesses that engage in activities relating to critical technologies, a regime referred to previously as the “Pilot Program.”
Under prior iterations of the regulations, a mandatory declaration for an investment in a U.S. business engaged in activities concerning critical technologies was only triggered when those activities were related to one of 27 sensitive industries specified by North American Industry Classification System (“NAICS”) code. The final rule abandons the industry-specific inquiry entirely, and instead adopts a new threshold analysis that focuses on the particular export controls that may be applicable to the critical technology utilized by the U.S. business.
The memo notes that the amendments do not change the definition of “critical technologies,” which is defined by FIRRMA and is, in part, subject to a separate ongoing rulemaking process by the Department of Commerce. We’re posting memos in our “National Security Considerations” Practice Area.
A recent Delaware Superior Court decision serves as a reminder that, under Delaware law, a merger may well involve an assignment by operation of law – even if the contract itself doesn’t specifically use the term “merger” in the language defining assignments. In MTA Canada Royalty Corp. v. Compania Minera Pangea, (Del. Super.; 9/20), the Delaware Superior Court held that a merger involved an impermissible assignment of rights under a mineral rights royalty agreement.
The Court rejected the plaintiff MTA’s argument that the anti-assignment clause did not extend to an “amalgamation” effected under Canadian law because the agreement did not expressly include mergers or amalgamations within the agreement’s non-assignment clause, and because the defendant did not suffer any unreasonable risk of harm as a result of the merger.
Instead, the Court determined that, under Delaware law, language in the contract prohibiting assignments “by operation of law” covered a merger in which the party in question did not survive. The Court also rejected the plaintiff’s contention that customary language allowing the agreement to be enforced by “successors and assigns” created an ambiguity as to whether the non-assignment clause was intended to cover successorship situations. To the contrary, it found that the defendant’s interpretation of the non-assignment clause’s successorship language was the only reasonable one: “successors and assignees can enforce the contract if they are valid successors or assignees.”
MTA also attempted to raise the unfairness of the result – it would let CMP off the hook for a payment that it would have otherwise been required to make. The Court wasn’t sympathetic:
In sum, CMP’s motion raises a straightforward issue of contract interpretation. Section 6.12 plainly prohibits assignments, including by operation of law, and that phrase unambiguously includes assignment through merger. MTA’s convoluted analysis does not create an ambiguity. Faced with this plain language that its predecessor voluntarily negotiated, MTA’s only “hook” is the apparent unfairness of allowing CMP to avoid making a payment it allegedly owes. But it is not this Court’s function to save sophisticated contracting parties from an unfair or unanticipated result of their own corporate transactions.
The Court said the parties could have avoided this result through careful drafting during the negotiating process or by using a different structure for the amalgamation. They didn’t, so the court held MTA to its bargain.