Transaction planners usually view the DOJ or FTC scuttling their deal as the “worst case scenario” for the outcome of an antitrust merger investigation. But as bad as that downside is, this Crowell & Moring memo is a reminder that it can get much worse – parties could find themselves facing civil or even criminal antitrust charges. This excerpt addresses a recent example:
In recent years, for example, the U.S. Department of Justice’s Antitrust Division has brought several civil and criminal prosecutions for anticompetitive conduct uncovered during a merger investigation. The most recent example of such follow-on prosecutions surfaced over the last several weeks when the DOJ announced that it had reached settlements with a number of the nation’s largest broadcast television station groups in a civil information sharing investigation.
In these cases, the DOJ charged the seven defendants with participating in an unlawful information sharing scheme where they exchanged – either directly or through advertising sales firms – non-public, competitively sensitive information in order to prevent local and national advertisers from negotiating better terms, including lower prices.
Since filing these enforcement actions and the accompanying settlements, the DOJ has publicly confirmed that it uncovered this information sharing scheme during its investigation into a proposed merger involving two of the defendants – a merger that was eventually abandoned after the DOJ and Federal Communications Commission (FCC) raised concerns about the deal’s likely competitive effects. The DOJ has also indicated that it is actively investigating other companies and that this ongoing investigation will likely result in additional charges in the coming months.
The memo provides an overview of this DOJ investigation and outlines key steps that companies can take to mitigate the risk of civil or criminal antitrust charges arising out of a merger investigation.
With the SEC’s recent expansion of Reg A eligibility to Exchange Act reporting companies, this Sheppard Mullin blog says public company buyers may want to give some thought to using Reg A to register shares issued in small transactions. Here’s an excerpt:
Regulation A could prove particularly useful to reporting companies that seek to use stock consideration ($50 million or less in a Tier 2 offering) to acquire a target company with many equity holders in a transaction that would otherwise require registration on Form S-4 due to the unavailability of Rule 506 of Regulation D or another exemption from registration under the Securities Act.
The SEC Staff has confirmed in published guidance (Compliance & Disclosure Interpretation, Question 182.07) that Regulation A may be relied upon by an issuer for business combination transactions, such as a merger or acquisition.
Advantages to Reg A as compared to S-4 include the ability of non-S-3 eligible issuers to incorporate information by reference into a Form 1-A, reduced line-item disclosure requirements, a generally “lighter touch” from the Staff on review, the absence of a required 20 business day solicitation period if information is incorporated by reference, blue sky preemption & the absence of Section 11 liability.
Of course, there are some disadvantages too – including an overall $50 million cap on offering size, limits on the value of unlisted securities to be received by a non-accredited target company shareholder and an inability to forward-incorporate by reference. Still, for many buyers, Reg A may be an option worth exploring.
Earlier this week, the Delaware Supreme Court held that a company’s disregard of corporate formalities may entitle a shareholder to access its emails and other electronic communications through a books & records demand. This Proskauer blog says this decision provides yet another reason for companies to rely on traditional, formal methods of corporate recordkeeping:
The Court’s decision in KT4 Partners LLC v. Palantir Technologies, Inc. should cause corporations to focus on how they maintain key corporate records. The Court held that, “if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions, and official letters, it will likely be able to satisfy a § 220 petitioner’s needs solely by producing those books and records. But if a company instead decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which § 220 entitles them.”
Thus, the more formal and traditional the corporation’s recordkeeping, the better a defense the corporation might have to a § 220 request for emails and other electronic communications, which can be quite burdensome to produce.
In this case, Chief Justice Strine’s opinion concluded that Palantir had “a history of not complying with required corporate formalities,” including failing to hold annual meetings, and that the shareholder had submitted evidence that Palantir had conducted other corporate business informally, including by means of email.
As a result, the Court concluded that traditional records were insufficient to provide information that would satisfy the shareholder’s proper purpose in making the demand, and ordered the company to provide its electronic communications.
Private equity buyers don’t often focus on ESG issues as part of the due diligence process, but this Norton Rose Fulbright blog says they probably ought to take the target’s performance on key ESG issues into account. Here’s an excerpt:
In private equity, environmental, social and governance (ESG) factors are often overlooked and undervalued. Due diligence is usually more focused on the financial and quantitative aspects of the target. However, in recent years, ESG has proven to be a powerful underlying factor for business successes and failures.
As evidenced by the #MeToo movement, and the various human resource scandals that have made headlines in recent months, an unhealthy corporate culture can have serious consequences for even the biggest of enterprises. A study that looked at 231 mergers and acquisitions between 2001 and 2016 found that ESG compatible deals performed better than those with disparate positions on ESG, by an average of 21%.
This figure should be considered alongside the fact that in 2016, more than 15,000 deals were terminated or withdrawn. The face value of these terminated deals totals $3 trillion. One can appreciate the time, effort, and costs incurred in relation to these proposed transactions, which is why investors need to look beyond the bottom line, and see how a target is achieving its results early on in the evaluation process.
The blog acknowledges that a target’s ESG performance can be a tough thing for a buyer to get its arms around, but notes that the application of emerging “big data” tools to the assessment can provide insights into risks and opportunities in the ESG area.
This recent blog from Weil’s Glenn West uses the Delaware Chancery Court’s recent decision in Great Hill Equity Partners v. SIG Growth Fund (Del. Ch.; 11/18) – which I blogged about last month – as a jumping-off point for a discussion of the perils of undefined fraud carve-outs to contractual liability caps.
Glenn points out that while the shareholders in Great Hill avoided liability beyond the contractual cap despite their CEO’s fraud, other selling shareholders haven’t fared as well. In at least one case, selling shareholders have found themselves litigating their responsibility for another shareholder’s fraud for years due to uncertainties about the scope and application of an undefined fraud carve. Even worse – as this excerpt points out – this issue may just be the tip of the iceberg:
It is important to note that the issue of whose fraud matters, in uncapping the liability-limitation regime, is literally just the tip of the iceberg of perils that undefined fraud carve-outs pose. The number of other, just under-the-surface, hazards that can do serious damage to your carefully crafted and capped liability-limitation regime are legion.
They include issues as to what kind of fraud is actually being carved out (yes there are surprising forms of fraud that do not involve the deliberate conveyance of falsehoods), as well as whether the fraud carve-out encompasses fraud with respect to any statement made in the course of negotiation, or only with respect to those statements that the parties agreed were the bargained-for factual predicates for the deal and therefore important enough to incorporate into the written acquisition agreement.
The blog points out that it has become established market practice to define fraud carve-outs so that only intentional misrepresentations by a particular seller relating to the specific representations and warranties in the agreement are carved out from the liability cap.
Proxy contests are probably more about politics and the art of persuasion than they are about law – and this recent study says that activists who get in front of investors before the incumbent board gain a significant advantage. This excerpt discusses just how big that advantage can be:
I find that the dissident’s communication strategy has an important effect on voting outcome and on proxy advisors’ recommendations, controlling for firm and dissident characteristics. Effective strategies entail the use of various communication channels, especially investor presentations, and the reflection of logical reasoning in the content.
Investor presentation is potentially a snapshot of all dissidents’ demands, so I focus on understanding how it affects voting outcome. As investors have limited attention, I investigate whether the timing of the presentation affects the voting outcome. Although the dissident is the first to bring proposals to the management, in only 49% of cases is the dissident the first to make a presentation.
Strikingly, I find that the dissident is 55 percentage points more likely to win if they are the first to make an investor presentation, after controlling for firm and dissident characteristics, ISS recommendations, the severity of issues in the firm, potential solutions provided by the dissident, and third party endorsements of the dissident.
The study says that the biggest factor behind the first mover advantage is investors’ limited attention spans. The first investor presentation simply gets a lot more investor attention than the second. Not surprisingly, that’s less true when it comes to institutional investors – and the first mover advantage is magnified when a company has a large number of retail investors.
Tune in tomorrow for the webcast – “Controlling Shareholders: The Latest Developments” – to hear Potter Anderson’s Brad Davey, Cravath’s Keith Hallam, Greenberg Traurig’s Cliff Neimeth and Sullivan & Cromwell’s Melissa Sawyer discuss the latest developments surrounding transactions involving controlling shareholders.
The Trump Administration’s emphasis on an “America First” policy when it comes to trade and foreign affairs generally has had significant implications for how companies conduct business – and this PwC blog says that their M&A activities are no exception.
The blog points out that cross-border deals have typically represented about 25% of US deal volume in recent years, and that ongoing trade tensions could prompt some companies to focus more on in-country transactions. And there’s some evidence that this is already happening – after a year of steady growth, the number of outbound US deals dipped by about 20% in the third quarter of 2018.
Despite the challenges, many companies remain interested in expanding their global footprint. This excerpt has some tips for companies pursuing cross-border deals in the current environment:
– Reconsider deal size. Many deals blocked recently by the US and Chinese governments have been at least $1 billion in value, and in some cases much more. That magnitude may have been a factor in government scrutiny. More moderate acquisitions may raise fewer concerns and still allow a company to move forward with its growth strategy.
– Smaller countries out of the tariff spotlight may yield possibilities. Some emerging markets have emerged, and economic power is dispersed. With information barriers largely gone, cities are more connected than ever. An urban hub in a less developed nation could offer similar quality investments to traditionally targeted countries.
– Some sectors don’t rise to a high level of regulatory scrutiny by the US and other countries, or they don’t involve as many atypical risks, even with expanded government reviews.
On this last point, while tech has been the hottest sector when it comes to cross-border transactions, deals in that highly-scrutinized sector still accounted for only 30% of cross-border M&A volume in 2018. As the blog notes, “that leaves 70% across a wide range of industries, including some – such as consumer products, real estate and certain manufacturing – in which the security and intellectual property concerns likely aren’t as great.”
Check out this Baker McKenzie memo for a region-by-region breakdown of expectations for global M&A and IPOs during the upcoming year.
Over the past several years, we’ve blogged quite a bit about privilege issues relating to M&A. Topics have ranged from who owns the privilege post-closing to the viability of assertions of a joint defense privilege between buyers and sellers. But this SRS/Acquiom memo covers a related issue that we haven’t addressed directly – M&A conflict waivers.
Waivers are an important topic, because without them, the ability of the seller’s lawyer to represent its shareholders in post-closing disputes can be murky at best. This excerpt explains:
Regarding the conflicts waiver issue, whether the seller’s law firm can continue after closing to represent the selling shareholders or the shareholder representative is not always clear. The law firm’s client is usually the selling company, not its shareholders. At closing, the company that was acquired becomes a part of the buyer, and therefore, the attorney-client relationship arguably flows to the buyer. This means that the selling company’s counsel may be conflicted out of taking a position that is contrary to the interests of the combined company, as this combined company now includes its current or former client.
The memo recommends confronting this issue head-on by having the seller negotiate for a waiver of the conflict to be included in the merger agreement itself, and includes a sample waiver provision.
Here’s the latest edition of Houlihan Lokey’s annual termination fee study. The study reviewed 185 transactions involving U.S. company targets and involving at least $50 million in transaction value announced during 2017.
The study focused on termination fees both as a percentage of “transaction value” and “enterprise value.” Transaction value is the total value of consideration paid by an acquirer, and is generally equivalent to “equity value.” Enterprise value is the number of outstanding shares multiplied by the per-share offer price, plus the cost to acquire convertible securities, debt, and preferred equity, less cash and marketable securities.
Here are some of the highlights:
– Termination fees as a percentage of transaction value during 2017 ranged from 0.5% to 6.7%, with a mean of 2.8% and median of 3.0%. The mean & median fees in 2016 were 3.2% and 3.3%, respectively.
– Mean & median termination fees as a percentage of enterprise value during 2017 were 2.9% and 2.8%, respectively. In 2016, the mean was 3.1% of enterprise value while the median was 3.2%.
– Reverse termination fees as a percentage of transaction value varied depending on whether the deal involved a strategic or a financial buyer. In 2017, the median fee was 3.1% for strategic buyers and 4.7% for financial buyers. In 2016, the median fee for strategic buyers was 3.6% for strategic buyers and 5.8% for financial buyers.
– Median reverse termination fees as a percentage of enterprise value in 2017 were 2.9% for strategic buyers and 4.8% for financial buyers. In 2016, the median fee was 2.9% for strategic buyers and 4.5% for financial buyers.