This recent Norton Rose Fulbright blog addresses the sometimes thorny issues associated with the need to obtain landlord consents in stock or asset purchase transactions. Here’s an excerpt:
In share purchase transactions, attention must be paid to change of control provisions, which may or not be considered a transfer or assignment under the terms of the lease. If the transaction falls under the definition of transfer / assignment, or change of control, landlord consent will likely be required.
That being said, what if it is not clear on the face of the lease whether the transaction is such that landlord consent is required? Similarly, if it is not clear whether consent is required, should a landlord consent request be sent in any event?
The urge must be resisted to provide landlord consent requests where landlord consent is not required under the terms of the lease. Providing a landlord consent where one is not required under the terms of the lease may suggest to the landlord that their consent is required, and could end up providing the landlord with more rights than they were originally granted under the terms of the lease. Furthermore, the landlord may object to the terms of the consent or transaction, but having provided them with same, it may be difficult to take such agreement back without wasting client time and money on an issue that was not an issue to begin with.
The blog also addresses interpretive issues associated with covenants from the landlord not to “unreasonably withhold” consent to a proposed assignment, and says that consent issues need to be surfaced & a strategy for resolving them mapped out early on in the transaction.
Getting a deal closed is usually the easy part – at least compared to the post-closing integration process. This Spencer Stuart memo looks at the lessons to be learned from companies that successfully integrated acquired businesses & those that did not. It identifies the following 7 key takeaways for successful M&A integration:
– Tackle the tough leadership decisions early.
– Plan for the team you need now AND 18 months from now.
– Articulate a value proposition for top performers
– Build trust and reduce fear through clarity.
– Define how the organizations are alike — and different.
– Don’t delegate your responsibility to model the new company culture.
– Manage your energy.
The memo goes into detail on each of the 7 takeaways identified above. Here’s an excerpt from the discussion about leadership decisions:
Most organizations use a very narrow definition of leadership when selecting top leaders for the merger. They often focus on individuals’ depth of knowledge or experience in a subject area and typically evaluate executives on their track record in their current or most recent positions. They may weight an attractive personality trait such as charisma or energy heavily.
But the knowledge and skills that propel executives in a previous role (usually in a more stable environment) are not good predictors of their ability to excel in a merger context. As a result, when organizations focus on these strengths rather than the leadership attributes that are essential to success in a merger, they can make the mistake of placing a strong performer in a position beyond their capabilities.
Settlements between companies & activists are common, with many companies agreeing to changes in governance, the addition to new board members, new strategic or restructuring initiatives, and/or a substantial return of capital to investors. In exchange for these concessions, corporate management hopes to buy peace and prevent a future proxy contest.
This Sidley memo says that’s not how it usually works out. The memo reviews common post-settlement issues, and says that any peace obtained through a settlement agreement is likely to be short in duration. Here’s an excerpt:
A settlement agreement may fail to provide an enduring peace. Many activist situations that were resolved with a rushed settlement subsequently escalated into a full-blown public fight after the standstill period expired. In other words, many settlements ultimately fail to achieve the board’s primary objective of preventing a public proxy battle.
The first important action a board can take when considering a settlement with an activist is to ensure it is negotiating state-of-the-art terms. Settlement agreements in shareholder activism are trend-driven; activists are reluctant to accept terms that will make them look weaker than their competitors. At the same time, with the right incentives they can be encouraged to sign a settlement agreement that commits them to a longer and more comprehensive standstill provision than they might otherwise accept.
Before signing the settlement agreement, the board should make sure it has thought through all of the ways in which this activist can harm the board and management during the term of the agreement. Will the CEO be specifically targeted? Will the board be subjected to new books and records requests? Does the draft agreement adequately regulate the activist investor’s ability to communicate with its designees on the board? Is the board comfortable that the new director will not unduly harm productive dynamics in the board room? Is the duration of the standstill sufficient to allow the company to accomplish objectives it would need to accomplish to pre-empt a repeat activist campaign when the standstill period ends?
The article says that boards need to take a hard look at their chances for success in a proxy contest before agreeing to a settlement. It points out that despite although companies often settle, they also typically win more proxy contests than do the activists opposing incumbent management.
This recent blog from Katz Sapper & Miller reviews how the SCOTUS’s 2018 decision in South Dakota v. Wayfair – which permitted states to impose sales tax liability on out-of-state sellers – has changed M&A due diligence.
We’ve previously blogged about Wayfair’s potential implications for buyers, but this blog looks at the due diligence implications of Wayfair from the perspective of both buyers and sellers. This excerpt discusses some of the steps sellers can take in advance to prevent unpleasant sales tax surprises:
– Identify what you sell and where you sell it. You need to know the overall number of transactions and sales numbers on a state-by-state basis. You also need to track individual products and services. Depending on the jurisdiction, some products or services may be exempt from tax.
– Identify exemptions that may apply and make sure they are documented. If a customer qualifies for a resale or use-based exemption (e.g., manufacturing), obtain the proper state documentation from the customer. Before the economic nexus rules affirmed by the Supreme Court, sellers might have paid limited attention to documenting exemptions because they had no physical nexus in a state and had no sales or use tax collection responsibilities. These exemption records take on more significance with the expansion of what creates nexus in a state.
– Determine where you are in compliance, where you are out of compliance, and why. When a seller can demonstrate thoughtful analysis of an issue like this, it adds credibility to your position and helps you manage the impact of potential sales tax liabilities on the deal. Buyers may not be happy to hear that there are risks in this area, but they will be much more receptive when you raise the issue, as opposed to a buyer discovering a potential liability of which the seller was unaware.
The blog also admonishes sellers to appreciate that their success in avoiding being tagged for non-compliance in the past isn’t going to persuade a potential buyer to overlook the risks and potential costs of previous and ongoing noncompliance. Sellers need to recognize that many potential buyers may be looking for a relatively quick resale of the acquired business, and the need to clean up sales tax problems may either deter them from moving forward or result in a hefty cut in what they’re willing to pay.
While most reps & warranties in deal agreements survive for a relatively short period of time following the closing, many of those agreements provide for extended survival periods for so-called “fundamental reps.” This Torys memo reviews the maximum periods that reps can survive under the laws of jurisdictions including Delaware, New York & Ontario. This excerpt demonstrates that the length of this period can vary quite a bit:
In Ontario, there is a 15-year ultimate limitation period which commences on the day that an act or omission takes place. This means that, no matter what language is used in the contract or when the breach of a representation, warranty or covenant was discovered, a claim cannot be brought after the 15-year limitation period.
In Delaware, there is caselaw to suggest that providing for “indefinite” survival of representations and warranties would have the effect of extending the three-year statute of limitations to twenty years. As New York law does not permit any extension, regardless of contractual language to the contrary, the six-year limit will apply.
Since that’s the case, many lawyers would say that this is another reason to pay close attention to the governing law clause of the agreement. But the memo says in this case, that’s not always enough:
A carefully negotiated and clearly drafted survival clause may ease a buyer’s worries (at least for agreements governed by Ontario or Delaware law). However, as statutes of limitation are considered procedural, they are generally governed by the law of the forum jurisdiction.
This means that, in order to have the benefit of a longer limitations period under Ontario or Delaware law, buyers should also select Ontario or Delaware as their choice of forum. Otherwise, parties could end up litigating in another jurisdiction, such as New York, that insists on applying its own limitations period despite the governing-law provision.
One of the things that public company sellers learn quickly is how announcing a deal often transforms their shareholder base. The board & management may picture a base comprised of long-term investors, but the truth is that many of these investors lock in their gains & sell out upon the announcement of a deal.
The folks on the buy-side of those trades are often “Arbs.” These are short term speculators focused on maximizing the value they can squeeze out of the stock – not based on the company’s performance, but on the risks and potential upside of the deal. Arbs operate in the shadows, and that’s part of what makes this CorpGov.com article by former Arb Ira Gersky so interesting. Here’s an excerpt with some pretty frank talk to CEOs about the expectations of their new owners:
While you may view the Arbs as a loathsome bunch of short-term hedge funds with no regard for the company beyond the deal, you need them on your side. Arbs are well resourced, highly skilled and control billions in capital. Not only can Arbs help provide critical market information, they can influence the ultimate outcome of your transaction.
Your stock, which the Arbs now own, trades at premium to its standalone value; absent a deal, it would revert to its unaffected value. Since Arbs are picking up nickels in front of the proverbial steamroller, the ever-present risk of a steep drawdown makes Arbs highly reactionary to new data points. Their bet centers on how much money could be made or lost from now until the deal close or break. Arbs seek answers to the basic questions: “Will the deal close? When will the deal close? What are the variables? How much am I risking?”
Arbs focus like laser beams on significant conditions & any developments that might affect the certainty of the deal closing. That means CEOs should expect a lot of probing phone calls about the status of the deal. The article goes on to discuss the key things that CEOs should keep in mind when dealing with inquiries from Arbs, including how to avoid the “Arb scrum” – which involves being surrounded by a howling pack of arbs at any public appearance – by using your IR folks as bouncers.
This Richards Layton memo discusses the Chancery Court’s recent decision in Shareholder Representative Services v. RSI Holdco, (Del. Ch.; 5/19), in which Vice Chancellor McCormick upheld a provision in a merger agreement preserving the seller’s privilege for certain pre-closing communications.
The Chancery Court’s 2013 Great Hill Equity Partners decision made it clear that Delaware’s default rule is that all privileges, including the attorney-client privilege, pass to the acquirer following the closing of an acquisition. However, the Great Hill decision also said that parties may contract out of the default rule, and, to a greater or lesser extent, many have done that.
The parties in RSI Holdco included a privilege “claw back” in their merger agreement that prohibited the buyer from using or relying on privileged communications in any post-closing dispute. Despite that, the buyer sought to use 1,200 of the seller’s pre-closing emails in litigation against the seller. Those emails had not been segregated in any fashion prior to closing, and the buyer argued that any privilege had been waived. The Vice Chancellor rejected those contentions, and this excerpt from the memo summarizes part of her reasoning:
The Court stated that “[p]ermitting [the Buyer] to both ‘use and rely on’ the [e]mails would further render the express language of [the privilege claw-back provision] meaningless.” The Court further explained that the Buyer’s arguments in support of a waiver of the privilege failed because the merger agreement required the parties to “take the steps necessary to ensure that any privilege attaching as a result of [Radixx’s counsel] representing [Radixx] . . . in connection with the transactions contemplated by this Agreement shall survive the Closing, remain in effect and be assigned to and controlled by the [Representative].”
Thus, for the privilege to be waived, the Court found that it would necessarily be due in part to the Buyer’s own failure to “take the steps necessary” to preserve the privilege. The Court found that the Buyer could not argue that its own failure to preserve the privilege should now inure to its benefit.
The RSI Holdco decision is the first post-Great Hill case squarely addressing a contractual provision intended to preserve the seller’s attorney-client privilege, and the memo says that it provides sellers with some important takeaways when it comes to the key terms to include in such a provision:
Following the guidance in RSI, target companies and their counsel are encouraged to ensure that privilege claw-back provisions not only provide for the preservation of pre-closing privileged communications, but that they also (i) provide for the express assignment of control over the privilege to the stockholders’ representative, (ii) require all parties to take steps to ensure that the privileged communications are preserved and vested in the stockholders’ representative, (iii) prohibit the buyer from making use of any such privileged communications, and (iv) define the scope of materials subject to these protections as those privileged as of the closing date.
The memo also points out that if a seller includes a provision as comprehensive as this, it will provide the seller with another important benefit – the ability to avoid engaging in “a pre-closing document review and segregation exercise” in order to protect the privilege.
I used to play golf, or at least I used to try to play golf. About the only thing I had going for me was that I could drive the ball a long way. Unfortunately nobody could ever predict in which direction my drive would head. For that reason, I came to both appreciate & depend on one of golf’s grand traditions – the “Beer Cart” the “Mulligan.”
Recently, a Delaware corporation that didn’t provide the notice of appraisal rights required under Section 262 of the DGCL argued that it deserved a Mulligan too – but in Mehta v. Mobile Posse,(Del. Ch.; 5/19), the Chancery Court shot that argument down. The gist of the defendants’ argument was that a supplemental notice provided subsequent to the filing of the lawsuit was enough to satisfy the notice requirement. What’s more, they had the chutzpah to attach the supplemental notice to the pleadings, and file a motion for judgment on the pleadings!
While a chutzpah strategy has won the day in the Chancery Court in the past, this recent blog from Francis Pileggi says it didn’t fly with Vice Chancellor McCormick:
The company sought a “do-over” or a mulligan for its statutory errors, because it purported to send proper notices required by DGCL Section 262–only after suit was filed. Three problems with that approach are that: (i) Such a “replicated remedy proposal” had never before been blessed by a Delaware court; (ii) Even the supplemental notice proposed was itself wrong (in part because it quoted the statute of another statute); and (iii) trying to make a “supplemental notice” sent after the lawsuit was filed does not always make it part of the pleadings.
If that wasn’t enough, the Vice Chancellor also refused to dismiss allegations that the defendants also failed to comply with various requirements under Section 228 & Section 251 of the DGCL, and found that stockholder consents approving the deal failed to achieve a ratifying effect under Section 144. In fact, the transaction appears to have been such a festival of statutory non-compliance that VC McCormick led off her opinion with the following statement:
The complaint in this case reads like a law school exam designed to test a student’s knowledge of these and other basic legal requirements for consummating the merger. The defendants, Mobile Posse and its board, would not have done well on that exam.
To stick with the golf analogies, if you see language like this at the beginning of an opinion, you’d be well advised to yell “FORE!” to the parties at whom it’s directed – because the judge’s drive has drawn a bead on them.
Activists getting personal with corporate CEOs is as American as uh, maybe not apple pie – but how about Campbell’s Soup? Over the years, many of the nation’s CEOs have exited altercations with activists like Carl Icahn, Dan Loeb & Paul Singer with at least one more orifice than they entered them with – and many activists seem certain that cultivating a Darth Vader image is good for business.
This Activist Insight newsletter reports that activists have toned things down in recent years, but says that Voce Management’s ongoing battle with Argo International is a notable exception. It also suggests that Voce’s hardball strategy may have backfired on it:
Voce opened with a 10-page letter cataloging CEO Mark Watson’s perks, including sponsorships for sailing races he liked to patronize, a family trip to India at Christmas in 2017 on a jet the activist said was owned by the company – Argo later said the aircraft “was neither owned by Argo, nor exclusively used by Argo,” and that personal trips were at executives’ expense – and luxurious accommodation in New York. The point was not only that the executive had been benefiting egregiously from his position, but that Argo had a cost management problem. Expensive office space hung with fancy artwork also featured heavily.
That strategy was thrown into doubt with the publication of Institutional Shareholder Services’ (ISS) recommendation, which was a vote on the management card for all incumbent directors. “Of note, the dissident’s decision to kick off its campaign with a flashy diatribe against the Argo CEO may have been a strategic misstep,” ISS wrote, “as the materiality of the dissident critique did not ultimately substantiate the degree of impropriety implied by its opening salvo.”
The article notes that ISS’s recommendation for management’s slate came despite its general agreement with Voce’s substantive criticism of the company’s business strategy & incentive comp arrangements. That being said, Agro outperformed both the S&P 500 and its peers, so this was a fight that was going to be difficult to win in any event – but Voce’s decision to get personal from the get-go doesn’t appear to have helped.