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.
This recent Deal Law Wire blog from Norton Rose reviews a 2020 study addressing why companies divest businesses. The study found that a staggering 77% of divestitures are attributable to M&A failures. The blog says that the study identified two driving forces behind these “corporate divorces” – post-acquisition industry shocks and cultural dissimilarities. Here’s an excerpt:
Post-Acquisition Industry Shocks. “Industry shocks”, or unforeseeable events that disturb industry structures and the economic landscape, were found to have a high correlation with the long-term success of a merger or acquisition, both positively and negatively. Targets who experienced a positive shock to their respective industry were less likely to be divorced, while divestitures were more likely to occur when the target’s industry experienced a negative shock. A similar effect is likely to occur as the result of the ongoing COVID-19 pandemic, with companies taking a sharp look at the profitability of their pre-COVID investments. While the pandemic has already led to significant changes in the M&A landscape, it may be years before the effects of this “industry shock” can fully be measured.
Cultural Dissimilarities. Cultural dissimilarities between acquiring and target companies was found to be the greatest driver of corporate divorce. Unions between companies with vastly different values and disparate ages frequently ended in divorce. According to the authors, this pattern reveals executives’ failure to adequately consider cultural values and symmetries, such as trust, hierarchy and individualism, before concluding M&A deals. CEOs often address M&A failures stemming from insufficient cultural awareness by quickly undoing unsuccessful deals, with 40% of corporate divorces happening within fours years of a new CEO’s term.
Many companies are expected to be active buyers during the upcoming year, and the blog says that careful due diligence and a proper assessment of corporate culture are essential to ensuring the long-term success of those acquisitions.
This January-February Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– An Extraordinary Course: Important Lessons from the Delaware Court of Chancery Decision in AB Stable VIII v. MAPS Hotels
– Innovations in Transactional Law: Finding the Next Opportunities for Efficiency
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Is a controlling stockholder’s “mere presence” on both sides of a transaction enough to invoke application of the entire fairness standard of review, or is something more required? That’s the question that the Chancery Court recently grappled with in In re Viacom Inc. Stockholders Litigation (Del. Ch.; 12/20). The case arose out of CBS and Viacom’s 2019 merger. The complaint alleged that, among other things, Viacom & CBS’s controlling stockholder, Shari Redstone, exerted her control over Viacom’s board in a manner that caused them to negotiate and approve the merger out of loyalty to her on terms detrimental to Viacom and its public stockholders.
The plaintiffs argued that the mere presence of the controlling stockholder on both sides of the transaction was sufficient to invoke the entire fairness standard of review. In response, the defendants argued that more was required:
For their part, Defendants, and in particular the NAI Parties, accurately quote Sinclair, where, to reiterate, the court held, “[t]he basic situation for the application of the [entire fairness] rule is the one in which the [controller] has received a benefit to the exclusion and at the expense of the [minority].”173 In keeping with this “basic” pronouncement, the NAI Parties maintain that in each instance where a Delaware court has observed that a controller’s presence on both sides of a transaction will trigger entire fairness review, there is always something more that causes the court to conclude that the controller is conflicted.
The defendants went on to note that the plaintiffs “can point to no Delaware case where the court reviewed the controller’s conduct for entire fairness where all the plaintiff had alleged was that the controller stood on both sides of a transaction.”
While acknowledging that the defendants were “right to seize upon nuance,” Vice Chancellor Slights cited the Delaware Supreme Court’s decision in Emerald Partners, in which the Court stated that a controller’s “stance on both sides as a corporate fiduciary, alone, is sufficient to require the demonstration of entire fairness.” He observed that Delaware courts generally can be trusted to “say what they mean and mean what they say,” and that the rule in Emerald Partners appeared to leave little room for nuance.
However, the Vice Chancellor did not need to formally resolve the issue of whether a controller’s mere presence was sufficient to invoke entire fairness review. That’s because he found that the plaintiffs had adequately pled that the controlling stockholder had received a “non-ratable benefit” by using the merger “as a means to consolidate her control of Viacom and CBS at the expense of the Viacom minority stockholders.”
This excerpt from a recent Sidley blog summarizes the key takeaways from the Vice Chancellor’s decision:
Although the Court’s discussion of “mere presence” is dicta, it provides important insight that future decisions from the Court of Chancery will find that the mere presence of a controller on both sides of a merger alone is sufficient to trigger entire fairness review in the absence of MFW dual protections (i.e., that the merger is approved by an independent special committee and a majority of the minority stockholders). It also reminds that while a controller who receives the same consideration as others may not trigger the “nonratable” benefit analysis, the receipt of control-related intangible benefits may suffice.