Earlier this month, the FTC unanimously ordered the unwinding of a merger involving two microprocessor prosthetic knee (MPK) companies that was completed in 2017. (h/t Prof. Brian Quinn). The transaction, which was not subject to the HSR Act’s pre-merger notification requirements, involved the acquisition of Freedom Innovations by Otto Bock. Here’s an excerpt from the FTC’s press release announcing the Commission’s order:
The Commission’s Opinion and Final Order states, “Based on our de novo review of the facts and law in this matter, we find that the Acquisition is likely to, and indeed already has, substantially lessened competition in the relevant market for MPKs… We hold that, to fully restore the competition lost from the Acquisition, [Otto Bock] must divest Freedom’s entire business with the limited exceptions granted by the [Administrative Law Judge].”
The Commission’s order represents the first time that the current Commission ordered that a consummated acquisition be unwound.
“The Commission is committed to ensuring competitive markets for the benefit of consumers, and there will be times when it has to act after a merger has been consummated,” said FTC Chairman Joseph J Simons. “The goal is always to restore the lost competition.”
This deal may be the first that the current Commission has ordered to be completely unwound, but post-closing challenges seeking structural remedies such as partial divestitures have become more common, and demands from regulators to unwind entire deals are not unprecedented. For example, in 2017, the DOJ required TransDigm to agree to unwind its acquisition of Schroth Safety Products as part of a negotiated settlement of the Antitrust Division’s challenge to that transaction.
Being required to “unscramble the eggs” in a completed merger is one of those nightmare scenarios that nobody wants to have to deal with. The parties did enter into a “hold separate agreement” with the FTC at the time the agency initiated its challenge in 2017, which may make the deal at least a little easier to unwind.
It’s worth noting that both the Otto Block & TransDigm cases involved deals that were below the HSR radar screen, and they once again illustrate the point that just because your deal may be on the smaller side, it’s not going to get a free pass when it comes to antitrust concerns.
I’ve previously blogged merger arbitrage and the impact that it can have on the parties’ stock prices after the announcement of a deal. But a new study says that the potential for post-signing shenanigans by arbs can play a significant role in the buyer’s initial decision concerning the type of consideration to use in the transaction. Here’s an excerpt from the abstract:
Announcements of stock-financed mergers and acquisitions (M&As) may attract short selling of bidder shares by merger arbitrageurs. We hypothesize that bidders that face higher short selling potential include a higher proportion of cash in their M&A payments in order to reduce the negative price pressure resulting from merger arbitrage short sales. Consistent with this prediction, we find a positive impact of the ex-ante lending supply of bidder shares on the percentage of cash in M&A payments.
A high supply of bidder shares available for lending means that arbs will have easier access to those shares for borrowing and fewer constraints on their ability to sell short. So, checking out the level of supply could provide helpful insights for sellers about potential buyers’ pain thresholds when it comes to the mix of stock and cash consideration when they’re negotiating a deal.
EY recently published the latest edition of its “Global Capital Confidence Barometer”, which surveyed more than 2,900 executives in 45 countries about a variety of macroeconomic & business topics, including their thoughts on the climate for M&A in the upcoming year. Here are some of the highlights:
– 68% of executives surveyed believe the global M&A market will improve over the next 12 months, 26% believe it will remain the same, while only 6% expect a decline.
– 52% expect their companies to be active participants in the M&A market during the upcoming year.
– 94% expect their deal pipeline to increase (49%) or remain the same (45%), and the same percentage expect to do the same (45%) or a greater number (49%) of deals during next 12 months.
The survey notes that one of the reasons for continued optimism is that companies can’t transform their portfolios as quickly as they need to without M&A. What’s more, it isn’t only the buy side that’s driving activity – companies are using divestments to find the capital they need for new acqusitions. When you add in the record levels of dry power in private capital, EY says that “all the components of sustained momentum remain in place.”
When it comes to the U.S., EY reports that executives are even more optimistic – with 83% expecting that the market will improve. But this Pitchbook article identifies a potential yellow light:
But there’s another side to the story: deal intentions slipped below the 50% mark for the first time in two years, with just 46% of US respondents saying they intend to actively pursue M&A in the next 12 months. Yet, given market conditions—56% of US executives deem regulatory impacts as their greatest external business threat—that’s still “pretty incredible,” according to Bill Casey, EY Americas Vice Chair of Transaction Advisory Services.
Overall, the survey suggests that we should look for another robust year when it comes to M&A activity, despite concerns about recession, trade wars, impeachment & the U.S. election – if for no other reason than that, in the current environment, businesses don’t seem to have viable alternatives to provide the growth that investors demand.
Nearly every acquisition agreement has numerous “belt & suspenders” type provisions – one topic might be the subject of a detailed contractual provision, but also encompassed by one or more contractual “catch-all” provisions. This Kirkland & Ellis memo reviews a recent Delaware Chancery Court decision that illustrates the perils of not addressing the hierarchy of these specific & general provisions in the acquisition agreement.
In ITG Brands v. Reynolds American, (Del. Ch. 9/19), Chancellor Bouchard was confronted with an asset purchase agreement that contained broad general descriptions of liabilities assumed by the buyer, as well as detailed descriptions of specific liabilities that would be the buyer’s responsibility.
The case involved the interplay between a general agreement to assume all liabilities for actions arising out of post-closing operations and specific language addressing the assumption of obligations under a tobacco settlement agreement with four states. The problem was that, after the closing, another state showed up to the party. This excerpt discusses how Chancellor Bouchard addressed the interpretive issues under the contract:
In simplified form, the question before the court was which party was responsible in the event of a fifth state investigation that generates liability from the post-closing conduct of the acquired business. The seller argued that the buyer is responsible as this clearly fell under the “general” post-closing Actions category. The buyer argued that the listing of only the four state investigations in the “specific” subsection showed an express intent to not assume responsibility for the fifth state investigation.
In the Reynolds decision, Chancellor Bouchard rejected both parties’ claims for judgment on the pleadings, finding that each reading was at least reasonable and therefore extrinsic evidence to determine the intent of the parties was required.
In support of the buyer’s reading, Chancellor Bouchard pointed to a 2005 Delaware Supreme Court decision (DCV) that addressed the overlapping representation question described in the first paragraph above. In DCV, the Supreme Court applied the contract interpretation principle that the specific takes precedence over the general and held that indemnification could only be sought by the buyer under the specific knowledge-qualified compliance representation.
Chancellor Bouchard did not accept the seller’s attempt to distinguish the DCV case, rejecting the seller’s argument that in DCV the two contradictory representations were in different sections while here the two “conflicting” sections were within the same list of seven assumed liabilities and therefore should be viewed as supplemental to each other.
The memo notes that the key takeaway from the Chancellor’s decision is not to put all of your faith in a “catch-all” provision, but to instead consider specifying a hierarchy among provisions that could be construed to cover the same matter or expressly indicate whether or not the specific terms “are intended as ‘including but not limited to’ examples of the general provision.”
Last June, I blogged about an Illinois federal judge’s decision to strike down a “mootness fee” settlement arising out of litigation surrounding the aborted Akorn/Fresenius deal. The judge concluded that mootness fees were a “racket” & that the case should’ve been dismissed at the outset of the litigation. The plaintiffs have appealed that ruling – and whatever the legal merits of the appeal, you’ve got to give them credit for their chutzpah. Why? Check out this excerpt from a recent D&O Diary blog:
In a blistering June 2019 opinion, Northern District of Illinois Judge Thomas Durkin, exercising what he called his “inherent authority,” acted to “abrogate” the parties’ settlement in the litigation arising out of the acquisition of Akorn , Inc. by Frensenius Kabi AG, and ordered the plaintiffs’ lawyers to return to Akorn their $322,000 mootness fee, ruling that the additional disclosures to which the company agreed were “worthless to shareholders” and that the underlying lawsuits should have been “dismissed out of hand.”
Now, in the brief to the Seventh Circuit filed on their appeal of Judge Durkin’s order, the plaintiffs argue that Judge Durkin’s order was “void” because Judge Durkin lacked jurisdiction, had “no authority to continue” after the parties’ settlement, and that he “drastically overstepped the bounds of [the court’s] inherent authority.” The plaintiffs brief sets the stage for what may prove to be a very interesting appellate decision.
Judge Durkin pointed to the 7th Circuit’s 2016 Walgreen decision in support of the position that class actions that don’t provide substantive benefits to shareholders should be “dismissed out of hand.” But the plaintiffs contend that whatever Walgreen may mean for class action settlements, it doesn’t give the court the authority to poke its nose into a private business agreement binding only the defendant & the individual plaintiffs.
Most limited partners are well aware that PE funds are quick to make capital calls, but much slower to pull the trigger on distributions. This Pitchbook article does a deep dive into PE cash management practices & makes some interesting observations about distributions to LPs. Here’s an excerpt:
Most funds take 12 years or more to fully liquidate. The industry is veering toward long-dated funds, some expressly intended to take 20 years or more to liquidate. The reality for “standard” funds is that many of them take almost as long to completely wind down. Many cases likely involve straggler investments and not the lion’s share of a fund’s portfolio, which may be sold off well within a 5 to 7-year time frame.
In fact, our data shows some sunny results, with about half of all PE funds making their first distributions by the 1.5-year mark. Another 25% make their first distributions by the 2.5-year mark, while 10% of funds need 3.5 years before wiring money back to their LPs.
One of Pitchbook’s conclusions is that better GPs often have quicker than average exits – since these folks make good investments in the first place, it’s easier for them to exit quickly. Not surprisingly, the article also says that smaller funds are quicker to liquidate much more quickly than larger funds. It also says that capital calls are cyclical, while distributions tend to be counter-cyclical. That apparently reflects the fact that post-recessionary funds are slower to invest & quicker to exit than their boom-era counterparts.
Earnouts are often used as a bridge to keep a deal together when the parties differ on valuation. Since that’s the case, people sometimes tip-toe around all sorts of issues relating to the terms of the earnout, including the extent of the buyer’s obligations to facilitate the achievement of milestones. As I’ve blogged previously, that’s a recipe for protracted litigation.
On the other hand, the Delaware Superior Court’s recent decision in Collab 9 v. En Pointe Technologies Sales (Del. Super.; 9/19) says that clarity is definitely a virtue when it comes to defining a buyer’s obligations under an earnout. In fact, this excerpt from a recent Morris James blog summarizing the case suggests that the best approach may be to hit the seller in the face with a 2 x 4 when it comes to this issue:
Under an asset purchase agreement (“APA”), the purchaser (“PCM”) acquired substantially all of the assets of the “En Pointe” business from the seller (“Collab9”). The APA provided for an earn-out payment, calculated upon a percentage of En Pointe’s Adjusted Gross Profit over several years. The APA provided that the purchaser “shall have sole discretion with regard to all matters relating to the operation of the Business.”
The agreement further disclaimed any express or implied obligation on the part of the purchaser to take any action, or omit to take any action, to maximize the earn-out amount, and stated that the purchaser “owes no duty, as a fiduciary or otherwise” to the seller. The APA also contained a clear combined integration and anti-reliance provision.
When the earnout milestone wasn’t achieved, the seller sued the buyer, alleging breach of the implied covenant of good faith and fraud. In dismissing the contract claim, the Court noted the asset purchase agreement’s “comprehensive and explicit” language on the parties’ obligations regarding post-closing operations, and concluded that there were no gaps to be filled by the implied covenant. It also dismissed the fraud claim, concluding that it was basically a repackaging of the breach of contract claim.
Check out this new Latham app, which allows you to access information about key aspects of the CFIUS national security review regime & direct investment regulation in other countries:
The Latham FDI app is organized by select countries around the world, including the US, Australia, China, France, Germany, Italy, Spain, Russia, Saudi Arabia, Singapore, United Arab Emirates, and the UK. After choosing a country, users can click through to read summaries of information pertinent to the respective jurisdiction, such as:
– Legal authority responsible for foreign investment review
– Mandatory filings
– Voluntary filings
– Timelines
– Filing fees
– Penalties
– Definitions of key words and phrases
Yesterday, Delaware Gov. John Carney nominated Justice Collins Seitz to serve as the Delaware Supreme Court’s next Chief Justice, replacing the departing Chief Justice Leo Strine. The Governor also nominated Vice Chancellor Tamika Montgomery-Reeves to take Seitz’s seat as an Associate Justice.
Justice Seitz has served on the Delaware Supreme Court since April 2015. VC Montgomery-Reeves has served on the Chancery Court since 2015 and is its first African-American member – and if her nomination is confirmed, she will also become the first African-American to serve on Delaware’s highest court.