State and local tax (SALT) issues are sometimes below dealmakers’ radar screens – but they can pack quite a wallop if they aren’t properly taken into account. This Morrison & Foerster memo provides an overview of how state & local tax laws can impact a transaction.
One of the things that the memo points out is that when it comes to taxes, the feds & the states don’t always see eye-to-eye. For instance, this excerpt highlights the fact that state & local authorities take a different point of view than does the IRS when it comes to successor tax liability in an asset deal:
For asset deals, states do not typically follow the federal income tax rule that there is no successor liability for a buyer unless the transfer constituted a fraudulent conveyance under state law. State successor liability statutes typically apply more broadly, do not require a fraudulent conveyance in order for successor liability to apply and may apply to more taxes than just sales and use taxes. State liabilities can be for all taxes. Just because you found the sales and use tax bulk sale law does not mean that you found all the tax bulk sale laws in the state. The laws can be contained in other tax statutes.
The memo also addresses how state & local income tax, sales & use taxes, real estate transfer taxes and unclaimed property laws can create problems for dealmakers – and highlights the need to include lawyers with SALT expertise on deal teams early on in a transaction.
I remember my law school Property prof’s discussion of the dreaded “rule against perpetuities.” I didn’t get it, and neither did my classmates. Finally, the prof threw in the towel, and said something along the lines of “I’m going to give you the same advice I got – there’s a definitive 1938 Harvard Law Review article on the rule against perpetuities. If you read it carefully, you will know enough about the rule to give the wrong answer to the question they’ll ask about it on the bar exam.”
Anyway, I sort of think that the whole issue of what constitutes a sale of “all” or “substantially all” of a company’s assets is corporate law’s version of the Rule Against Perpetutities. When I taught law school, I used to tell my students that if they did this stuff for a living, they’d eventually be asked to write the same 20-page memo on whether a particular deal involves the sale of substantially all of the assets of a company that the lawyer assigning it to them wrote 25 years ago. And the answer will also be the same – some variation of “maybe, but then again, maybe not.
If you’ve already drafted this memo, I can’t be of much help to you. But if you haven’t, I can at least point you in the direction of this Greenberg Traurig memo that introduces the Nevada sale of assets statute, discusses its plain meaning, and reviews case law interpreting “all” and “substantially all” in the sale of assets statutes in various other jurisdictions including Delaware, California, Connecticut, and Illinois. If you read it carefully, you’ll know enough to give a more definitive tone to the “maybe, but then again, maybe not” answer you give in your memo.
This Fox Rothschild blog reviews the Delaware Supreme Court’s recent decision in Leaf Invenergy Co. v. Invenergy Renewables, LLC, in which it reversed the Chancery Court’s decision to award only nominal damages in connection with a company’s breach of an investor’s consent right. Instead, the Court determined that the plaintiff was entitled to $126 million in damages! This excerpt summarizes the Court’s reasoning:
The High Court found that Leaf had previously negotiated consent rights when investing $30 million into Invenergy, which required the investor’s permission in advance of any material sale. Per the opinion, the relevant contract provision reflected each side’s intention to either move forward with a such a sale only with Leaf’s consent, or to require Invenergy to buy out Leaf if it did not consent to the transaction. When the Court of Chancery determined that those rights had been breached, it should have upheld contractual provisions calling for a damages multiplier, per the Supreme Court.
Instead, Vice Chancellor Laster held that an “efficient breach” had occurred, because even though Invenergy did not seek Leaf’s consent prior to the sale, the trial court found that Leaf received more in the sale than it would have under the contract terms. Vice Chancellor Laster thus decided on the $1 nominal damages award because he determined that Leaf was left no worse off despite the breaches, in light of the efficient breach doctrine.
When assessing damages, the High Court found that the Court of Chancery erred by limiting its focus on the harm to Leaf in the context of the results of the sale, rather than considering the full effect of Invenergy’s contractual breach in failing to seek Leaf’s consent and then failing to pay the target multiple. The Supreme Court stated held the trial court should have taken a broader approach that “considered the combination of [all aspects of the contractual breaches] when assessing what injury Leaf suffered from Invenergy’s breach and thus what amount of damages would return Leaf to the position it would have been in had Invenergy not breached [the contract]”.
This decision may turn out to be good news for holders of preferred stock generally. That’s because recent Delaware precedent suggested that directors’ fiduciary duties to common holders might require them to use the “efficient breach” concept in order to avoid complying with preferred stock’s contract rights.
For example, in Hsu Living Trust v. ODN Holding, (Del. Ch.; 5/17), Vice Chancellor Laster held that a board’s fiduciary duty to common shareholders may obligate it to breach contractual obligations to preferred shareholders if it could do so through an “efficient breach.” The Supreme Court’s approach in Invenergy complicates the efficient breach analysis, and may increase the leverage of preferred holders when attempting to exercise or enforce those rights.
This SRS Acquiom study reviews the financial & other terms of 1,200 private target deals that closed during the period from 2014 through 2018. Here are some of the key findings about trends in last year’s deal terms:
– The median time from first investment round to exit increased to 7 years in 2019, up from 5 years in 2016
– Cash remained the preferred currency for private deals, with stock and cash/stock deals representing less than 15% of deals in 2018
– Post-closing purchase price adjustments are now guaranteed by separate escrows 56% of the time – compared to only 27% as recently as 2015. More than 2/3rds of 2018 deals used “GAAP, consistent with past practices” as the methodology for preparing purchase price adjustments.
– Earnouts in non-life sciences deals dropped significantly. Only 13% of those deals had earnouts last year, compared to 23% during 2017. The size of earnouts also declined, representing just 27% of deal value in 2018 compared to 43% in 2017.
– The median general survival period for indemnity escrows was 15 months in both 2018 & 2017. Median escrow size was 10% of transaction value. Over 90% of fundamental reps had a defined survival period, reflecting the continuing trend away from indefinite indemnities that began with the Cigna v. Audax decision.
– Nearly half of deals had “Big MAC” qualifiers for the accuracy of seller’s representations, up from 31% in 2015. The more traditional formulation requiring those reps to be accurate “in all material respects” appeared 51% of deals.
There’s plenty of other interesting stuff to review in this study, including more on financial terms, closing conditions, indemnification, dispute resolution and termination fee arrangements.
Here’s something I recently blogged over on TheCorporateCounsel.net:
This Bass Berry blog says that companies that have adopted exclusive forum provisions in their charter or bylaws shouldn’t be surprised to receive comments on their disclosures about them in SEC filings. The blog includes links to a handful of recent comment letters touching on various aspects of exclusive forum provisions. Check it out!
Vertical mergers traditionally haven’t been subject to the same regulatory scrutiny as those involving direct competitors. But this Jenner & Block memo suggests that recent FTC decisions involving merger challenges, as well as the FTC’s hearings on competition & consumer protection in the 21st century indicate that the climate is changing. Here’s an excerpt:
Traditionally, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) have reviewed vertical mergers with more leniency than horizontal mergers. With the Division’s challenge of the AT&T-Time Warner deal and the FTC’s settlement decree in the Staples-Essendant merger, some wonder if the traditional approach may be undergoing a change.
The FTC’s decision earlier this year by the set of all new commissioners on the Staples-Essendant merger, reflected its first bipartisan split. Although the majority decision emphasized the FTC’s continued commitment to mainstream antitrust policy, statements by the Commissioners, especially the dissenting Democratic Commissioners, indicated a possible divergence away from that policy and that vertical mergers may be facing heavier scrutiny going forward.
On April 12, 2019, in the FTC’s 13th hearing of a series of 14 on Competition and Consumer Protection in the 21st Century, FTC commissioners further opined on the benefits of heavier scrutiny, this time on both sides of the political aisle.
In a potentially ominous development, the memo also notes that several Commissioners extolled the potential benefits of “merger retrospectives” – which involve reviewing the effects of a transaction on competition following the closing, and potentially initiating post-closing challenges to the deal.
The memo also points out that the FTC remains relatively friendly to vertical mergers in comparison to the DOJ. So far, the FTC’s enforcement actions against non-horizontal mergers have been limited to behavioral remedies, while the DOJ has required structural remedies such as divestitures in some recent vertical mergers.
Buying distressed companies, whether through bankruptcy or otherwise, presents some unique challenges – as well as some unique opportunities. This 233-page Wachtell outline provides a comprehensive an overview of alternative methods for acquiring distressed businesses.
Topics addressed include typical corporate responses to debt crises, as well as the various issues associated with out-of-court, hybrid & bankruptcy acquisition strategies, and with acquiring & trading claims in distressed companies. Here’s an excerpt from the introduction:
Distressed companies can represent attractive acquisition targets. Their stock and their debt often trade at prices reflecting the difficulties they face, and they may be under pressure to sell assets or securities quickly to raise capital or pay down debt. Accordingly, prospective acquirors may have an opportunity to acquire attractive assets or securities at a favorable price. This outline considers how best to acquire a distressed company from every possible point of entry, whether that consists of buying existing or newly issued stock, merging with the target, buying assets, or buying existing debt in the hope that it converts into ownership.
For many M&A lawyers, the world of distressed acquisitions is much different from the one they’re used to operating in – and this outline is a very valuable resource to have at your side when trying to navigate it.
Last year, the SCOTUS created significant uncertainty concerning the application of a commonly used mechanism to protect former shareholders in an LBO from fraudulent conveyance claims. In Merit Management Group, LP v. FTI Consulting, Inc., the Court held that Section 546(e) of the Bankruptcy Code’s safe harbor for transactions made through a financial institution did not apply to transactions in which financial institutions were mere “conduits.”
Prior to the Court’s decision, the safe harbor was widely viewed as protecting public shareholders because the payments that they received in a deal were ordinarily disbursed through a financial institution “paying agent,” and several federal circuits had interpreted this payment procedure as sufficient to invoke the protection of Section 546(e).
The Merit Management decision raised concerns about the continuing viability of this safe harbor, but a recent decision from the SDNY appears to have breathed new life into it. As this Ropes & Gray memo explains, it did so not by focusing on the level of a financial institution’s involvement in the transaction, but by focusing on what parties might properly be characterized as “financial institutions.” Here’s an excerpt:
In In re Tribune Company Fraudulent Conveyance Litigation, No. 11md2296 (S.D.N.Y. Apr. 23, 2019), U.S. District Court Judge Cote ruled that payments in a leveraged buyout to thousands of shareholders are protected because having a traditional financial institution (e.g., a commercial bank or trust company) as an intermediary in the transaction can qualify the company making the payments (in this case, Tribune) as itself a “financial institution” within the meaning of Bankruptcy Code section 546(e).
Specifically, Judge Cote held that the safe harbor’s statutory definition of “financial institution” included Tribune, as the transferor, because Tribune was a “customer” of Computershare Trust Company (the depositary for the LBO), and CTC acted as Tribune’s agent in the transaction. Judge Cote held that the payments were made “by . . . a financial institution” and were “in connection with a securities contract” (a term that courts define very broadly), thus qualifying for the safe harbor, notwithstanding Merit Management.
The memo also says that the Tribune Company decision “provides a road map” to secure the safe harbor defenses for payments made in LBOs, leveraged recaps & similar transactions. But it also cautions that Judge Cote’s opinion – though persuasive in its reasoning – is likely to be far from the last word on the issue.
The early reviews on the Delaware Supreme Court’s Aruba Networks decision are coming in – and they’re mixed. Academics have a lot of questions about the theoretical basis for the Court’s endorsement of a “deal price minus synergies” approach to appraisal in most settings. Here’s an excerpt from Prof. Ann Lipton’s take:
The problem is, this standard (1) gets further away from DFC’s description of appraisal as providing sellers with “what … would fairly be given to them in an arm’s-length transaction,” and (2) introduces the very uncertainty and judge-imposed economic evaluation that Dell and DFC seemed to want to avoid. (As Brian Quinn put it, “People understand that ‘deal price minus synergies’ is mumbo-jumbo, right? It’s just a guess. It’s not scientific.”)
But the worst thing about this standard is it how pointless it is. An analysis that defers to deal price so long as the process is “Dell compliant” at least has a purpose, namely, as a backdoor mechanism of policing compliance with fiduciary duties. An analysis that looks solely at market price (absent reason to think market price is unreliable) moves appraisal into the box of providing liquidity, which is a reasonable place for it to be.
But a deal-price-minus-synergies test serves no purpose at all. It doesn’t have anything to do with liquidity, and it doesn’t protect against flawed processes, since a court will probably find enough synergies to suggest that the flawed process still resulted in some add above standalone value.
On the other hand, if you’re a buyer trying to get a deal done as cost-effectively as possible, the Aruba Networks decision is very good news. That’s because, as this excerpt from a recent Dechert memo explains, it strikes another significant blow against appraisal arbitrage:
Though the decision does not mandate a “deal price minus synergies” standard in all statutory appraisal proceedings, absent a showing of deficiencies in the process that led to the deal price or other unusual circumstances, merger consideration less synergies will be viewed as strong—and likely conclusive—evidence of fair value.
Accordingly, Aruba Networks will likely further limit appraisal arbitrage activity by investors who purchase shares of a target after a transaction is announced and then commence an appraisal proceeding seeking to recover a premium above the deal price. Because fair value must exclude deal synergies, which can be substantial, Aruba Networks shows that stockholders exercising appraisal rights face a substantial risk of receiving less than the deal price.
Appraisal is a messy & cumbersome process that – for a time – was turned very effectively into another way for hedge funds to bet on one side or the other of a deal at the Wall Street casino. Personally, I’m not inclined to shed any crocodile tears for those funds if they find their roll of the dice much riskier now.
But on the other hand, for the past decade, Delaware has increasingly funneled merger litigation into a path that leads to appraisal as the preferred, if not sole, remedy for shareholders unhappy with a merger. And if that’s now essentially a dead end except in extraordinary circumstances, it’s just another reason for plaintiffs to say “I’ll see you in federal court.”
Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Mayer Brown’s Nina Flax, Baker Botts’ Sam Dibble, Shearman & Sterling’s Bill Nelson and our own John Jenkins share M&A “war stories” designed to both educate and entertain.