DealLawyers.com Blog

We have posted the transcript for our recent webcast: “How to Handle Hostile Attacks.” 

– John Jenkins

Earlier this week, in Tiger v. Boast Apparel, (Del.; 8/19), the Delaware Supreme Court rejected contentions that a presumption of confidentiality should apply to materials produced in response to a Section 220 books & records request.  Here’s the intro from this Proskauer blog:

The Delaware Supreme Court yesterday rejected a presumption of confidentiality for documents produced pursuant to books-and-records inspection requests under § 220 of the Delaware General Corporation Law. The decision holds that courts can impose confidentiality restrictions in appropriate cases, but that some justification of confidentiality is necessary – and that an indefinite period of confidentiality should be the exception, not the rule.

In light of the emphasis that the Delaware Supreme Court has placed on § 220 requests particularly in the context of shareholder derivative actions, parties making and receiving those requests might now need to focus more closely on whether and the extent to which confidentiality restrictions can be justified and, if so, how long they should last.

The blog says that indefinite confidentiality agreements for information produced in response to a Section 220 request now appear to be disfavored in Delaware, and that the case will likely result in more attention being paid to both the need for and the duration of any confidentiality agreement.  It also says that future cases may address the extent to which parties may be restricted from discussing potential derivative claims based on such information with other shareholders.

– John Jenkins

This PwC blog discusses some of the uncertainties arising out of 2017’s tax reform legislation that continue to create challenges for dealmakers.  Here’s the intro:

The sweeping US tax overhaul that has been in effect for well over a year was intended to simplify America’s tax code. It has prompted businesses to factor the changes into their growth strategies and scenario planning, particularly in light of ongoing trade tensions.

But the 2017 tax reform act continues to be a complex law to digest, requiring specialists to manage ongoing developments around key areas, including: tax implications on tariffs, employee compensation, state tax laws, and capital availability. Uncertainties around these areas likely will linger for some time, and how dealmakers respond going forward could impact the quality and value of their next deal.

For instance, many consumer market companies today are evaluating their supply chains and pricing approaches to be cost-effective and tax-efficient. As they contemplate relocating sourcing, manufacturing and distribution, they will need to consider carefully the law’s international provisions, including the global intangible low-taxed income (GILTI), the base erosion and anti-abuse tax (BEAT), and the foreign derived intangible income (FDII) deduction. Moreover, it will be critical to examine pitfalls around interest limitations while leveraging tax reform’s opportunities at the federal, state and local levels.

– John Jenkins

The WSJ recently reported that the FTC’s ongoing probe of Facebook is focusing on its M&A activities and whether it used acquisitions to eliminate potential competitors. If it’s any consolation to the beleaguered social media titan, Dechert’s latest report on antitrust merger investigations says that it’s far from the only tech company under the antitrust microscope.  In fact, deals involving tech companies accounted for 40% of new U.S. investigations during the first half of 2019 – and that’s a marked departure from historic trends:

The Healthcare & Pharmaceuticals industry has kept the U.S. antitrust agencies the busiest since 2011, accounting for about 28% of U.S. significant investigations. The Retail & Consumer Products and Technology industries are tied for second at 14% of significant investigations, followed closely by Industrial Products & Services at 13%.

Significant investigation levels by industry have been relatively consistent over time. In comparing the first half of the period tracked by DAMITT(2011-2014) with the second half (2015-H1 2019), DAMITT observes that only one industry (Chemicals) has seen a change in relative frequency of more than 3 percentage points between the two time periods.

However, the Technology industry has seen a much more significant spike this year, accounting for about 40% of significant U.S. merger investigations in H1 2019 after remaining below 15% in each of the six prior calendar years.

The report says that U.S. antitrust regulators concluded 20 “significant investigations” during the past 12 months, down from 28 for the prior comparable period. These  investigations took an average of 11.4 months from announcement to completion, compared to 9.9 months during the prior 12 months. A quarter of all significant investigations during the period involved vertical aspects, up from 18%.

According to the report, DOJ has been more successful than the FTC in picking up the pace of significant investigations. More than 80% of DOJ’s H1 2019 significant investigations lasted fewer than 10 months, while only one of the FTC’s investigations lasted fewer than 10 months.

– John Jenkins

This Lazard report summarizes shareholder activism during the first half of 2018. Here are some of the highlights:

–  In H1 2019, 107 new campaigns targeted 99 companies, down ~25% relative to H1 2018 but in line with the elevated multi-year trend.

– Top 10 activists increased their cumulative capital deployed in public activist positions (new and existing) from $75.5bn at the end of Q1 2019 to $82.2bn at the end of H1 2019.

– Starboard’s 10 new campaigns, including three new campaigns in Q2 2019, made them the most prolific activist in H1 2019. Elliott remains the leading activist in terms of capital deployed, with $3.4bn of new capital deployed in H1 2019 and a total of $17.4bn deployed in new and existing activist positions

– 46% of all activist campaigns in H1 2019 had an M&A thesis, as activists continue to see transactions as opportunities to generate alpha − Comparatively, from 2014-2018, M&A-related objectives arose in only one-third of all campaigns.

– Activists won 81 Board seats in H1 2019, 91% of which came from settlements. Of the 19 campaigns that went to a final vote in H1 2019, 15 were against non-U.S. targets and activists prevailed in only three situations.

– The record 14 long slates nominated in H1 2019 yielded 28 seats out of the 99 seats initially contested, with two of the long slate campaigns still ongoing.

Lazard also points out that active managers are no longer waiting for a shareholder vote to express their concerns. In contested situations, they are going public with their views corporate strategy and M&A. In some cases, active managers are choosing to act as the activist themselves – even nominating Board slates (e.g., Neuberger Berman at Verint, M&G at Methanex).

– John Jenkins

Tune in tomorrow for the webcast – “Joint Ventures: Practice Pointers (Part II)” – to hear Troutman Sanders’ Robert Friedman, Proskauer’s Ben Orlanski, Cooley’s Marya Postner and Aon’s Chuck Yen provide an encore to our popular June webcast with even more practical advice on navigating your next joint venture. The topics include:

1. Joint Ventures vs. Contractual Collaboration
2. IP Issues: JVs Based on An Owner’s Platform Technology
3. Negotiating “Divorce” Up Front
4. Consider Piloting a JV Before Full Commitment
5. Majority/Minority Dynamics
6. Acting By Written Consent
7. Clarifying JV’s Purpose
8. Pay Principles: Benchmarking & Long-Term Incentives
9. How Key Pay Decisions Are Made

– John Jenkins

Non-disclosure agreements often distinguish between the parties with whom information may be shared and those parties who are bound by the agreement.  This recent Weil blog highlights a 6th Circuit case that addresses the consequences of that distinction and the perils of entering into an NDA with an intermediary.

Knight Capital Partners v. Henkel AG, (6th Cir.; 7/19) involved an expired NDA entered into between Henkel, a subsidiary of Henkel AG, and Knight Capital Partners, or KCP, an intermediary who hoped to establish a distribution arrangement for a novel cleaning product. After the NDA lapsed without a deal, KCP filed a lawsuit allegations that Henkel AG breached the NDA by using confidential information acquired under it to develop a new product. The trial court rejected those contentions, and the 6th Circuit affirmed. This excerpt from the blog summarizes the Court’s reasoning:

The Sixth Circuit affirmed the trial court’s judgement. While Henkel Parent Co. was clearly an “affiliate” of a “Party” to the NDA (i.e., “any individual, corporation or other business entity, which directly or indirectly, controls a Party, is controlled by a Party, or is under common control with a Party”), and therefore entitled to receive the confidential information as a defined “Receiving Party” under the NDA, Henkel Parent Co. was not actually bound by and liable for breaches of the NDA as a contracting Party, only Henkel US was. In other words, only Henkel US was responsible for alleged breaches of the NDA, whether they were the result its own actions or those of Henkel Parent Co., its parent

The blog notes that this distinction between parties with whom information may be shared and those who are bound by the NDA is a very common approach in private equity settings. It’s also a widely used approach outside of the private equity context. Perhaps more importantly, the case highlights the perils of entering into an NDA with an intermediary:

Although summary judgment was ultimately obtained, this dispute was litigated for over three years because a middleperson with whom a potential counterparty had entered into an NDA apparently felt cut out of a deal that in fact was never consummated. That’s the potential nightmare that needs to be considered anytime these intermediary arrangements are contemplated. Getting the language right in the NDA is paramount, of course, but avoiding these situations unless absolutely necessary is even better.

– John Jenkins

Rising stock prices may be good for your 401(k), but this WSJ article says they’re putting the squeeze on private equity funds:

Rising stock valuations are forcing private-equity firms to contribute more cash to their leveraged buyouts. That is likely to drag down performance in the long term even as pensions and other investors increasingly turn to private equity to boost returns.

Private-equity firms contributed 52% to the purchase prices of companies they bought in the second quarter of the year, according to data from research firm Covenant Review, a unit of Fitch Solutions, up from 45% in the first quarter. That compares to an average of 47% and marks the highest quarterly figure since Covenant Review began tracking the data in January 2017.

The problem is that while the rising stock market is driving equity valuations higher, banks are still not willing to lend more than 6x EBITDA, which leaves PE funds with a gap that they need to fund with equity if they want to play in today’s deal market. Because the magic of private equity is using other people’s money to leverage your own capital & generate higher returns, the need to use more equity means the returns to private equity investors are likely to get squeezed.

Since private equity has driven so much M&A activity in recent years, does this potential squeeze on returns mean the party’s over? Maybe, but then again, this isn’t the first time PE funds have been forced to pony up more equity for acquisitions. In fact, it’s not even the second time. . . or the third time. . .

– John Jenkins

Depending on the circumstances, public companies may have make Form 8-K filings disclosing the terms of an acquisition or divestiture. That filing obligation may arise under Item 1.01 of Form 8-K, which requires an 8-K to be filed when a company enters into a material definitive agreement, and under Item 2.01, which requires a filing upon completion of an acquisition or disposition that exceeds certain bright line size tests.

This Bass Berry blog provides a good review of the circumstances under which public company buyers may need to file a Form 8-K with the SEC disclosing an acquisition. Here’s an excerpt addressing things to consider when assessing whether a purchase agreement for a deal that falls outside of the bright lines laid out in Item 2.01 of Form 8-K triggers an Item 1.01 filing obligation:

If an acquisition is significant to a registrant but Item 2.01 is not triggered, then the registrant may have a challenging judgment as to whether the acquisition agreement should trigger a filing under Item 1.01 of Form 8-K. In this regard, relevant factors may include:
– Key income statement metrics of the acquired business compared to the registrant (which may include revenue, operating income, net income and EBITDA)
– The book value of the assets of the acquired business compared to the registrant
– The purchase price paid by the registrant in comparison to the book value of the registrant’s assets
– The purchase price paid by the registrant in comparison to the enterprise value and/or market cap of the registrant
– Whether the acquisition would result in a significant increase in the debt leverage of the registrant and/or would require additional debt or equity financing sources
– Whether the acquired business would give rise to a new product or business line or reporting segment of the registrant or otherwise further any key strategic initiatives or goals of the registrant
– Whether the registrant is particularly acquisitive (if this is the case, this may somewhat move the needle against Item 1.01 being triggered in connection with any particular acquisition)
– Whether any members of the management team of the target company will become executive officers or directors of the registrant
– Whether there are other obligations or benefits (including under ancillary agreements) material to the registrant related to the acquisition
– The past practice of the registrant with respect to whether it has filed acquisition agreements under Item 1.01 (if a similar past acquisition of a registrant has triggered an Item 1.01 filing, this may support the decision to similarly file a subsequent similar acquisition)

The blog notes that in assessing the income statement, balance sheet & purchase price metrics referenced above, some practitioners use a “rule of thumb” that if one or more of these comparisons exceeds 5% or 10%, that may indicate materiality, although qualitative factors also need to be considered.

– John Jenkins

I think most M&A lawyers would agree that working with experienced people usually results in a much smoother transaction process than what you experience working with folks who are new to the M&A game.  When it comes to getting a deal done, there’s just a lot to be said for experience.  This recent McKinsey study says that experience also matters a lot when it comes to getting the most out of an acquisition. Here’s an excerpt:

Nearly a decade ago, we set out to answer a critical management question: What type of M&A strategy creates the most value for large corporations? We crunched the numbers, and the answer was clear: pursue many small deals that accrue to a meaningful amount of market capitalization over multiple years instead of relying on episodic, “big-bang” transactions. Between 1999 and 2010, companies following this programmatic approach to M&A generally outperformed peers.

That pattern is even more pronounced in today’s fast-moving, increasingly uncertain business environment. A recent update of our research reflects the growing importance of placing multiple bets and being nimble with capital: between 2007 and 2017, the programmatic acquirers in our data set of 1,000 global companies (or Global 1,000) achieved higher excess total shareholder returns than did industry peers using other M&A strategies (large deals, selective acquisitions, or organic growth). What’s more, the alternative approaches seem to have under-delivered. Companies making selective acquisitions or relying on organic growth, on average, showed losses in excess total shareholder returns relative to peers

The study suggests a number of factors account for the success of programmatic M&A, including effective integration of M&A planning with the company’s overall strategy, incorporating integration planning into the due diligence process, careful consideration of cultural issues, and an approach that views M&A as an enduring capability rather than a one-off project or occasional event.

– John Jenkins