Deal lawyers have devoted a lot of attention to the Treasury’s new FIRRMA Pilot Program regs, but some less noticed aspects of the new legislation may also have a big impact on deals. For example, here’s a recent memo from Seyfarth Shaw pointing out that with the enactment of FIRRMA, CFIUS’ jurisdiction now extends to transactions involving certain real estate.
Under FIRRMA, transactions open to CFIUS review now include now include foreign purchases or leases of real estate in an airport or martime port, or that is in close proximity to sensitive military or government faciltiies – in either case, if such transaction could provide foreign persons with the ability to collect intelligence or expose national security activities. This excerpt from the memo provides some key takeaways for parties dealing with CFIUS’s new jurisdiction over real estate:
– If you are selling or leasing property to (i) a non-U.S. entity, or (ii) an entity owned or controlled by a foreign entity or government, check to see if the property falls into one of the categories set forth above. If so, a filing with CFIUS may be required.
– If you are a landlord or property manager owned or controlled by a non-U.S. entity, does the rental application you receive contain sensitive personal information that might be used to threaten national security (for example, is the applicant is a government entity or a government contractor)? If so, a filing with CFIUS may be required.
– If a filing is required, you need to determine whether a full CFIUS filing or merely a declaration is required.
– If a CFIUS submission is required, this could delay the timing of your transaction by up to 90 days (in rare cases more).
The memo also points out that regulations under the new regime have yet to be promulgated – so stay tuned.
This Schulte Roth memo discusses the issues associated with an investor obtaining representation on a public company board. Although the memo is addressed to the investor, it’s a useful resource for companies as well. Here’s the intro:
Representation on the board of directors of a public company has significant advantages for an investment firm looking to maximize, or just simply protect or recover, an investment. But a huge compliance minefield awaits if not thought through beforehand. Seats on a public company board can result from an activist campaign, a private equity investment that has completed an IPO, participation in a private placement of securities in an already public company or even a friendly invitation from an issuer looking for investor representation on its board. However you get there, if a principal or employee of your firm sits on the board of a public company, or any company, the value of understanding the issues that come along with that cannot be understated.
Among other topics, the memo reviews trading restrictions, reporting requirements, consequences of “affiliate” status & state law fiduciary duty issues.
We’ve previously blogged about the litigation challenging Xerox & Fujfilm’s controversial proposed merger. In May, a New York Supreme Court judge issued a 25-page opinion enjoining the deal. On Tuesday, New York’s 1st Dept. Court of Appeals issued a terse 3-page order overturning that ruling.
The Court held that all of the Xerox board’s decisions about the proposed transaction were protected by the business judgment rule. Here’s an excerpt addressing the former CEO’s conflicts that featured so prominently in the trial court’s ruling:
To the extent former CEO of Xerox, Jacobson, was conflicted, inasmuch as the transaction provided that he would serve as the future CEO of the new company, the conflict was acknowledged; he neither misled nor misinformed the board (see Mills Acquisition v. Macmillan, Inc., 559 A2d 1261, 1264 [Del. 1989], compare Deblinger v. Sani-Pine Prods. Co., Inc., 107 AD3d 659 [2nd Dept. 2013]). The board, which engaged outside advisors and discussed the transaction on numerous occasions prior to voting on agreeing to present it to shareholders, did not engage in a mere post hoc review, nor was the transaction unreasonable on its face (see In re MeadWestvaco Stockholders Litig., 168 A3d 675, 683 (Del Ch 2017), compare Sinclair Oil Corp. v. Levien, 280 A.2d 717 [Del. 1971]).
In light of the foregoing, the business judgment rule does apply (Auerbach v. Bennett, 47 NYS 619 [1979]. And upon application of the business judgment rule, plaintiffs did not make a showing of the likelihood of success on the merits in the actions, which allege breaches of fiduciary duty and fraud.
While the facts relating to the conflicts in this transaction cited in the trial court’s ruling were eyebrow-raising, the 1st Dept.’s decision to overrule the decision is not all that surprising. As we noted in our prior blog, commentators observed at the time of the earlier decision that it was unlikely that a Delaware court would have enjoined the deal.
With the Court’s ruling, this Reuters article says that as far as the potential Fujifilm/Xerox deal goes, the game’s afoot once again.
After the Rural/Metro mess of a few years ago, there are few words that send a chill down a dealmaker’s spine more quickly than “aiding & abetting.” This Cleary Gottlieb blog says that a recent Delaware Chancery Court decision imposed aiding & abetting liability on an unusual suspect – an activist investor Here’s the intro:
The Delaware Court of Chancery yesterday found an activist investor aided and abetted a target board’s breaches of fiduciary duty, most significantly by concealing from the target board (and from the stockholders who were asked to tender into the transaction) material facts bearing on a potential conflict of interest between the activist investor and the target’s remaining stockholders. See In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018).
At issue in the case was the failure of an activist & its board representative to disclose a tip received about a potential buyer’s interest in the company to the full board. Vice Chancellor Laster said that withholding that information was inappropriate, both because the activist’s short-term focus might lead it to seek a quick sale in lieu of long-term value maximization, & because of the director’s role in spearheading the potential sale process. As a result, he held that the director breached his fiduciary duty by failing to disclose the tip, and that the activist aided & abetted that breach.
Notwithstanding the finding of liability, there was an important silver lining for the activist – the Court held that there were no recoverable damages in the case, based in large part on its conclusion that the sale process, though flawed by the non-disclosure, was sufficient under Dell & DFC Global to result in deference to the deal price as representing the company’s value.
The blog says that the key takeaways from the case are the importance of full disclosure of conflicts to the board and shareholders, and the Chancery Court’s willingness to extend the deference to the deal price found in recent appraisal cases to breach of fiduciary duty and aiding and abetting claims.
I have heard that the Chancery Court’s 246-page decision in Akorn v. Fresenius is the longest opinion ever issued by the Court. While most commentators have focused on the Court’s analysis of the MAE clause at issue in the case, I thought it was impressive that Steve Quinlivan scoped out an interesting sidebar discussion of “efforts clauses” that doesn’t appear until page 212 of that opinion. Here’s an excerpt from Steve’s recent blog:
Describing how many deal lawyers think, the Court cited the ABA Committee on Mergers and Acquisitions which ascribed the following meanings to commonly used standards:
– Best efforts: the highest standard, requiring a party to do essentially everything in its power to fulfill its obligation (for example, by expending significant amounts or management time to obtain consents).
– Reasonable best efforts: somewhat lesser standard, but still may require substantial efforts from a party.
– Reasonable efforts: still weaker standard, not requiring any action beyond what is typical under the circumstances.
– Commercially reasonable efforts: not requiring a party to take any action that would be commercially detrimental, including the expenditure of material unanticipated amounts or management time.
– Good faith efforts: the lowest standard, which requires honesty in fact and the observance of reasonable commercial standards of fair dealing. Good faith efforts are implied as a matter of law.
The Court noted that commentators who have surveyed the case law find little support for the distinctions that transactional lawyers draw. Consistent with this view, in Williams Companies v. Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction agreement that used both “commercially reasonable efforts” and “reasonable best efforts.” Referring to both provisions, the high court stated that “covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.” The high court did not distinguish between the two.
I salute Steve for reading this entire opinion – I’m only on page 120. Also, it looks like the folks at Kirkland & Ellis have read it cover-to-cover too – check out their memo addressing the efforts clause discussion in Akorn.
A few months ago, I blogged about the DOJ’s decision to apply its FCPA corporate enforcement policy – which provides significant incentives for voluntary disclosure & remediation efforts – to successors in M&A transactions. Now, the DOJ is extending that policy to other types of misconduct. Here’s the intro from this Wachtell Lipton memo:
In an important speech, Deputy Assistant Attorney General Matthew Miner of the Department of Justice’s Criminal Division announced on Thursday that DOJ will “look to” the principles of the FCPA Corporate Enforcement Policy in evaluating “other types of potential wrongdoing, not just FCPA violations” that are uncovered in connection with mergers and acquisitions. As a result, when an acquiring company identifies misconduct through pre-transaction due diligence or post-transaction integration, and then self-reports the relevant conduct, DOJ is now more likely to decline to prosecute if the company fully cooperates, remediates in a complete and timely fashion, and disgorges any ill-gotten gains.
The memo urges buyers to engage in “careful pre-acquisition due diligence and effective post-closing compliance integration” in order to best position themselves to take advantage of the DOJ’s enforcement approach in situations where misconduct at a target is uncovered.
In order to rely on MFW’s path to business judgment review of transactions with a controlling shareholder, the deal must be conditioned on independent committee & majority of the minority shareholder approval “ab initio.” In Flood v. Synutra, (Del.; 10/18), the Delaware Supreme Court affirmed an earlier Chancery Court decision & held that MFW’s ab initio requirement doesn’t necessarily require those conditions to be spelled out in the buyer’s first overture. Here’s an excerpt from this Potter Anderson memo that explains the Court’s reasoning:
The Synutra International case involved a proposal by Liang Zhang to acquire the approximately 36.5% of the stock of Synutra International that he did not already own. Zhang’s initial offer to Synutra was not conditioned on either special committee approval or a vote of a majority of the minority stockholders. Shortly after the formation of a special committee, however, Zhang sent a second letter to the newly-formed special committee that did contain these requisite conditions.
As the Supreme Court explained in affirming the Court of Chancery’s dismissal of the action based on compliance with MFW, this second letter satisfied the ab initio formulation, coming as it did in the “beginning” of the process and before economic negotiations commenced. As the Court stated, “so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process, . . .and has not commenced substantive economic negotiations with the controller, the purpose of the pre-condition requirement of MFW is satisfied.”
Justice Karen Valihura issued a lengthy dissent from the Court’s opinion. In her view, the intent to comply with MFW’s key procedural protections must be contained in the controlling shareholder’s initial formal written proposal. We’re posting memos in our “Controlling Shareholders” Practice Area.
The memo also points out that the Court overruled dicta in its MFW opinion suggesting that a plaintiff asserting a due care claim could avoid application of the business judgment rule by challenging the deal’s pricing. The Court said that “a plaintiff can plead a duty of care violation only by showing that the Special Committee acted with gross negligence, not by questioning the sufficiency of the price.”
Yesterday, the Treasury Department issued regulations for a pilot program under the “Foreign Investment Risk Review Modernization Act.” The pilot program focuses on controlling & non-controlling investments in U.S. businesses involved with a “critical technology” in any of 27 industry sectors.
Most export-controlled technologies are considered “critical technologies” under the pilot program. Industry sectors covered by the program include a variety of aerospace & defense, infrastructure, industrial, & technology businesses. This Akin Gump memo summarizes the new regulations. Here’s an excerpt addressing the program’s mandatory notification requirement:
The pilot program establishes a mandatory declarations requirement for transactions that (i) could result in control of a Pilot Program U.S. Business by a foreign person or (ii) involve a noncontrolling investment in a Pilot Program U.S. Business. The parties to such transactions may either submit a written notice that triggers a full CFIUS review or a “declaration” (i.e., abbreviated notices that generally should not exceed five pages in length).
If parties file a declaration, CFIUS will have 30 days to either clear the transaction, request a written notice, initiate a CFIUS review or inform the parties that CFIUS did not have enough time to complete its review and that the parties may submit a written notice.
Here’s the Treasury’s Fact Sheet on the pilot program. The program will become effective on November 10, 2018. The memo notes that it doesn’t apply to certain transactions that were under a binding written contract prior to October 11, 2018. We’re posting memos in our “National Security Considerations” Practice Area.
The case involved minority shareholders who had agreed to customary “drag along” provisions giving the majority shareholders the ability to compel a sale of the minority’s shares in any sale transaction approved by a majority of the outstanding shares. The drag along language also included an agreement to refrain from exercising appraisal rights. The plaintiffs argued that this waiver of appraisal rights was unenforceable. This excerpt from the memo discusses those arguments and the Vice Chancellor’s response:
First, the plaintiff stockholders made a number of textual arguments regarding the language of the drag-along provisions. For instance, because the drag-along provisions stated that the stockholders were to “refrain from exercising” their appraisal rights, as opposed to “waiving” those rights, the plaintiffs maintained that their appraisal rights did not extinguish. According to the plaintiffs, the provisions merely obligated them to delay the exercise of those rights until after closing. The court disagreed, finding that reading to be an unreasonable interpretation of the provision. Although the use of the word “waive” might have been clearer, the court ultimately held that the use of the term “refrain” unambiguously extinguished the stockholders’ appraisal rights.
Second, the plaintiff stockholders argued that the drag-along rights, if construed to include an appraisal waiver, were unenforceable because they violated section 151(a) of the DGCL. As a general rule, holders of common stock in a Delaware corporation are entitled to appraisal rights in accordance with section 262. Further, section 151(a) requires that limitations on classes of stock must be set out in, or derived from, the corporation’s certificate of incorporation. Thus, the plaintiffs argued that to be enforceable, a waiver of appraisal rights must appear in the certificate of incorporation pursuant to section 151(a), and that appraisal rights cannot be waived by contract, such as a stockholder agreement.
The court disagreed, finding that enforcement of the appraisal waiver in the stockholder agreement is “not the equivalent of imposing limitations on a class of stock.” It reasoned that the stockholder agreement “did not transform the [plaintiffs’] shares of stock into a new restricted class.” Rather, “individual stockholders took on contractual responsibilities in return for consideration,” which included refraining from seeking appraisal.
The memo notes that this decision provides increased certainty to private equity & venture investors that incorporate drag along provisions & appraisal waivers into their investor agreements. But it also points out that the case demonstrates plaintiffs’ continued willingness to challenge the terms of these arrangements, and the importance of careful drafting.