This McKinsey memo addresses the importance of a well-designed communications program to the success of an M&A transaction. Here’s the intro:
Structured communications play a critical role in mergers by preventing the distractions that often accompany them and could even damage the existing businesses. In addition, the communications plan lays a foundation for the combined organization’s future success. It is one of the few merger workstreams that go “live” immediately, as soon as merger conversations begin. The communications team announces the deal and then helps to develop, engage, and manage integration planning and execution.
A strong communications strategy and plan promote business continuity by ensuring that the right messages are communicated and reinforced to minimize the anxiety of employees, boost morale, and retain talent. They also convey the combined organization’s future vision and strategy to key stakeholders—both internal and external, including customers, regulators, vendors, and employees. In this way, the plan builds momentum and enthusiasm for the merger and corrects any misinformation and myths that might arise about it.
The communications plan is a vital tool to inform and influence stakeholders before transactions close, so it is critical to start early and get the message right, both before and after the close.
The memo reviews the role of communications across the deal’s timeline, from due diligence through post-closing integration, and outlines a process to build a communications strategy, to execute & monitor that strategy, and to improve communications about the deal.
This Richards Layton memo reviews this year’s proposed amendments to the Delaware General Corporation Law. Here’s an excerpt summarizing the proposed changes:
If enacted, the 2019 amendments to the General Corporation Law would, among other things
– add new provisions relating to the documentation of transactions and the execution and delivery of documents, including by electronic means, and make conforming changes to existing provisions;
– significantly revise the default provisions applicable to notices to stockholders under the General Corporation Law, the certificate of incorporation or the bylaws, including by providing that notices may be delivered by electronic mail, except to stockholders who expressly “opt out” of receiving notice by electronic mail;
– consistent with the foregoing, update the provisions governing notices of appraisal rights and demands for appraisal;
– update the procedures applicable to stockholder consents delivered by means of electronic transmission;
– clarify the time at which a unanimous consent of directors in lieu of a meeting becomes effective; and
– make various other technical changes, including with respect to incorporator consents and the resignation of registered agents.
The amendments, with the exception of those relating to appraisal rights, would be effective on August 1, 2019. The amendments to Section 262 (appraisal) would be effective for merger agreements entered into on or after August 1, 2019.
My recent blog about the Rent-A-Center case noted that the company’s claim for a $126.5 million reverse termination fee remains pending in the Chancery Court. This Cleary Gottlieb blog addresses why we should pay close attention to the Court’s decision on that part of the case.
The blog points out that reverse termination fees don’t carry the kind of fiduciary duty baggage associated with seller termination fees, and are simply a matter of contract. They are often sought by sellers if the parties anticipate that antitrust regulators will either oppose the deal or require significant divestitures or demand other remedies unacceptable to the buyer.
Vintage is likely to counter Rent-A-Center’s emphasis on the terms of the contract with an argument that the fee is an unenforceable penalty. This excerpt says that the consequences of a decision in favor of Vintage could have a significant impact on how parties address antitrust risk going forward:
Should the court side with Vintage on this issue, it could potentially lead sellers to demand more express commitments from buyers in terms of offering specific divestitures and behavioral remedies to the agencies rather than relying on the stick of a large reverse termination fee coupled with a general obligation to use commercially reasonable efforts or reasonable best efforts to obtain clearance. In addition, sellers may be reluctant to proceed with a transaction involving heightened antitrust risk.
While the Delaware courts have never addressed the issue of whether a reverse termination fee involves a penalty, the issue of whether a breakup fee cast as a liquidated damages clause involved a penalty was addressed at length by the Delaware Supreme Court in Brazen v. Bell Atlantic, 695 A.2d 43 (Del. 1997). Although a lot of water has gone under the bridge on deal protections since that case, the Court’s analysis of the penalty issue may be relevant in this case as well.
This Locke Lord memo suggests that a recent Delaware case may be reason for PE fund representatives on portfolio company boards to take a closer look at their D&O coverage exclusions. Here’s the intro:
In a case with implications for director and officer protections, and of particular relevance to principals of private equity firms, the Delaware Superior Court recently denied two former directors coverage under a D&O insurance policy. In Goggin v. National Union Fire Insurance Company of Pittsburgh, the Court construed a “capacity” exclusion in the policy to exclude coverage of an underlying claim that arose out of the directors’ positions as investors in the company, despite the fact that their alleged misconduct was a breach of their duties as directors and thus on its face eligible for coverage.
Goggin and Goodwin were investors in U.S. Coal Corporation beginning in 2007 and 2008, becoming directors in 2009 and remaining in that position until their resignations in 2014 and 2012, respectively. During their terms as directors, in an attempt to reinvigorate the failing U.S. Coal via debt repurchases and other recapitalization activities, they formed two investment vehicles for which they acted as manager or investor. Shortly after U.S. Coal entered bankruptcy in 2014, suit was brought alleging that Goodwin and Goggin breached their fiduciary duties and committed other acts for their own personal benefit.
The carrier disputed coverage, contending that the claim was attributable to actions taken by the directors in their capacity as investors, not as directors. The Court applied a “but for” test & held that because the fiduciary duty claims would have failed but for their roles with the investment vehicles, the carrier was off the hook. The blog notes that exclusions like these can significantly impact PE investor/directors during down round financings or in other distressed situations involving portfolio companies.
This morning, the Delaware Supreme Court will hear oral arguments in the appeal of Vice Chancellor Laster’s decision in the Aruba Networks appraisal case. The proceedings are scheduled for 10:00 am EDT, and will be livestreamed if you’re interested in checking them out. If you’d like to get up to speed on the case, I’ve blogged about Aruba Networks several times here and over on “John Tales” – and you should also check out this recent blog from Steve Hecht & Glen McGillivray.
After all these years, the scariest movie I’ve ever seen remains “The Exorcist” – and I’ve seen it a lot, because one of my high school teachers had a part in it & he wasn’t shy about finding excuses to show it to us. Reading law blogs doesn’t typically send a chill down my spine like The Exorcist does, but there’s one exception – Weil’s “Global Private Equity Watch.” Glenn West & his colleagues have a knack for coming up with scenarios involving seemingly inconsequential oversights that can turn into disasters.
This time, they’ve chosen a topic that is inherently terrifying – the perils of texts & emails. And the blog warns that when it comes to those kinds of communications between PE Funds’ representatives on portfolio company boards, there’s a lot to be scared about. Here’s an excerpt from the intro:
Unlike communications among the private equity firm’s professionals concerning the status and performance of its investment in a portfolio company, communications among two or more board members serving on behalf of a private equity firm regarding their actions as board members may constitute “books and records of the company” for which any other director may, with a proper purpose, demand the right to inspect under Section 220 of the Delaware General Corporation Law.
In this modern age, of course, those communications can include any of the various forms of electronic communications and social media now available, including text messages (by mobile carriers or via social media) and emails. And it matters not that those communications may have been sent through your or your firm’s phone, or on your firm’s email server or your private email account. Understanding this fact may cause some pause before pressing send on a text message to your colleague and fellow board member concerning another board member’s approach or competence in considering an appropriate course of action for the company.
Directors’ rights to inspect books & records are much broader than shareholders’ rights – a director with a proper purpose has a virtually unfettered right to access the company’s books & records. The blog points out that in a recent decision involving the dispute between “Papa John” Schnatter & Papa John’s Pizza, the Delaware Chancery Court held that if directors use personal accounts and devices to communicate about corporate matters, they should expect to produce such information to the company.
Anybody who’s received communications from PE directors opining on their fellow board members will quickly realize what a horror show a books & records request might just turn out to be.
Francis Pileggi recently blogged about a Delaware Superior Court decision holding that claims for attorneys’ fees arising out of a breach of a merger agreement didn’t accrue until after the Delaware Supreme Court ruled on the underlying breach of contract claim & the defendants refused to pony up. Here’s an excerpt:
A recent decision by the Complex Commercial Litigation Division of the Delaware Superior Court in Winshall, et al. v. Viacom International, Inc., (Del. Super.: 2/19), ruled that a claim for indemnification was not ripe until a final adjudication, after appeal, was decided. In a matter involving a claim for indemnification for attorneys’ fees based on a finding of a breach of a merger agreement by the Court of Chancery, which was affirmed by the Delaware Supreme Court, the Superior Court held that a subsequently filed indemnification claim was not barred by the statute of limitations because the claim did not become ripe until the affirmance by the Delaware Supreme Court. See Slip op. at 17-19.
In contrast, the court dismissed the plaintiff’s claims for indemnity for taxes and diminution in value based on the defendant’s delay in making contractual earnout payments. Unlike the claim for legal fees, the court held that these claims accrued at the time the applicable provisions of the merger agreement were breached, and that the statute of limitations on them had run.
It’s becoming increasingly rare to see the Delaware Chancery Court issue an order enjoining a deal – but that’s what Vice Chancellor McCormick did earlier this month in FrontFour Capital v. Taube(Del. Ch.; 3/19). The transaction involved a proposed acquisition of two entities, Medley Management and Medley Capital, by a company called Sierra Income. The pricing terms of the two acquisitions were very different – while Medley Management would receive a 100% premium to market, Medley Capital shareholders were to receive a price that provided no premium to its net asset value.
Medley Management was majority owned by two brothers, who also owned a less than 15% stake in Medley Capital. To make a long story short, the court found that, despite the brothers’ relatively low ownership interest in Medley Capital, they were controlling shareholders of that entity. It also found that the Medley Capital board willfully deferred to them, and allowed them to dominate a process that was kind of a mess. The Vice Chancellor ultimately found that the controlling shareholders and the directors breached their fiduciary duties.
The plaintiffs sought both corrective disclosure & a requirement that the company be actively shopped in order to seek a better deal. VC McCormick enjoined the deal pending distribution of revised disclosure, but as this Morris James blog notes, she decided that she was precluded from ordering that the company be shopped free from the contractual deal protections. This excerpt explains her reasoning:
With respect to the remedy, the Court enjoined the stockholder vote pending corrective disclosures. The Court reasoned, however, that controlling precedent prohibited the most equitable remedy: a Court-ordered “go shop” free from deal protections. Specifically, the Delaware Supreme Court’s decision in C & J Energy Services, Inc. v. City of Miami Gen. Empls. and Sanitation Empls. Ret. Tr., 107 A.3d 1049 (Del. 2014) prevented the Court from infringing upon the acquirer’s rights in the deal protection provisions without a finding of wrongdoing on its part.
The blog says that the plaintiffs did allege wrongdoing on the part of the buyer. Specifically, the plaintiffs claimed that the buyer aided & abetted the breaches of fiduciary duty. But this claim wasn’t pursued in discovery or addressed in the plaintiffs’ briefs.
This Fried Frank memo says that two recent enforcement actions against foreign subsidiaries of US companies highlight the importance of pre-acquisition sanctions due diligence in cross-border transactions. Here’s the intro:
In the last two weeks, OFAC issued two enforcement actions for activities conducted by foreign subsidiaries that violated U.S. sanctions laws. On February 14, 2019, OFAC announced a $5.5 million civil penalty against AppliChem GmbH, a German company, for deliberately and surreptitiously continuing business with Cuba after being acquired by a U.S. company. On February 7, 2019, OFAC announced a settlement with Kollmorgen Corporation, a U.S. company, because its Turkish subsidiary continued conducting business in and with Iran after it was acquired by Kollmorgen.
These settlements highlight the importance of U.S. companies conducting enhanced sanctions due diligence on foreign targets during the M&A process, and implementing sanctions compliance policies at the new foreign subsidiaries. It is equally important to monitor the foreign subsidiaries’ compliance with U.S. sanctions laws and internal policies. Failure by foreign subsidiaries to comply with OFAC regulations could result in significant penalties for both the parent and subsidiaries.
U.S. persons are prohibited from conducting or facilitating business in or with sanctioned countries, and foreign subs of U.S. companies are directly subject to compliance obligations with respect to U.S. sanctions against Cuba and Iran. Accordingly, buyers should conduct thorough due diligence to find any history of dealings with sanctioned entities or countries. The memo also recommends implementation of U.S. sanctions compliance policies at the newly-acquired sub, particularly if there’s a history of conducting business with sanctioned parties.