After issuing a second request as part of the HSR review process, antitrust regulators often seek a “timing agreement” addressing key timing and logistical issues arising in the merger investigation. In a recent blog, the FTC announced that it had adopted a new Model Timing Agreement. This excerpt describes the purpose of these agreements:
Merger investigations commonly involve timing agreements, which—among other things—provide an agreed-upon framework for the timing of certain steps in the investigation. Timing agreements also ensure that FTC staff has notice of parties’ plans to consummate the transaction. Both parties and staff benefit from having such a framework established shortly after issuance of the Request for Additional Information and Documentary Material, also known as a Second Request, as it allows staff and the parties to engage efficiently in a substantive exchange without undue uncertainty during the Second Request review period.
The blog summarizes the key provisions of the Model Timing Agreement, and notes that the FTC expects that future timing agreements will conform, or substantially conform, to this Model.
The legality of arrangements with finders & unregistered brokers is a murky and complex area. Fortunately, this Venable memo provides a nice overview of the legal issues and the parameters of available exemptions. This excerpt provides an overview of some of the potential pitfalls of being classified as a unregistered broker under the federal securities laws:
The distinction between a finder and a broker-dealer as classified by the Securities and Exchange Commission can have significant consequences. An unregistered broker-dealer may face sanctions from the SEC, and it may be unable to enforce payment for its services. In addition, transactions involving an unregistered broker-dealer may create a right of rescission in favor of the investors, allowing the investors the right to require the issuer to return the money invested.
One example of the consequences of an unregistered broker-dealer occurred in the Ranieri Partners SEC enforcement action. In that action the SEC brought charges against a private-equity firm, its managing director, and a consultant because of the consultant’s failure to register as a broker-dealer. The SEC’s order found that the private equity firm paid transaction-based fees to a consultant, who was not registered as a broker-dealer, for soliciting investors for private fund investments.
The memo reviews the SEC’s guidance on the difference between “finders” and “brokers,” discusses federal and state securities law provisions relating to “M&A brokers,” reviews FINRA guidance and its regulatory relief for “Capital Acquisition Brokers,” and also addresses issues under the JOBS Act.
The “corporate opportunity” doctrine provides that a corporate fiduciary who take a business opportunity that might have been instead given to the corporate entity is liable to the company for any resulting gains. If you’re a private equity fund with portfolio companies in similar industries, this can create some thorny problems.
However, this Ropes & Gray memo (p. 11) reviews the Delaware Chancery Court’s recent decision in Alarm.com Holdings v. ABS Capital Partners, (Del. Ch.; 6/18) and says that putting in place well drafted contractual carve-outs at the outset of a business relationship can go a long way to preventing corporate opportunity problems from arising. Here’s an excerpt:
This decision highlights that financial sponsors should seek to draft transaction and governance documents to make clear that the sponsor may have invested in the target’s competitors, may invest in those competitors in the future, and is not subject to the “corporate opportunity” doctrine.
While it is not always commercially possible to do so, it is also desirable for such language to also include express “residual information” disclaimers noting that there is information the investor may learn about the target through its investment that it cannot then remove from its collective knowledge, as well as language stating clearly that parallel investments are permissible. Such language could prevent claims for breach of fiduciary duty or misappropriation of trade secrets, or, at a minimum, provide the sponsor with strong arguments to support a motion to dismiss if such claims are asserted.
There are some interesting responses in Intralinks’ recently published 2017 Limited Partners Survey. Here are some of the highlights:
– More than 1/3rd (35%) of LPs confirmed that their current allocation to alternative investments was more than 30%, with one in five committing up to 10% to alternatives.
– Poor performance and outflows of $102 billion in 2016 would suggest that hedge funds have lost a bit of their lustre. At the same time, private equity funds have gone from strength to strength. Last year, 917 funds closed, raising $372 billion of aggregate capital. With to real estate funds, total fund numbers rose between January 2016 and January 2017 from 493 to 533. Last year, this asset class attracted USD117 billion in net inflows.
– One of the ongoing issues and sources of frustration among LPs is the level of transparency they receive. The survey findings underscore this, with more than half of respondents (54%) confirming that there were only “somewhat satisfied” with the level of transparency they receive from fund managers.
– More than 2/3rds (68%) of LPs said that co-investment opportunities were either “very important” or “somewhat important” to them.
– Of those that were interested in direct investing, 60% said that they had increased their pace of direct investing – as opposed to allocating to funds – over the last three years.
While private equity remains a popular alternative investment destination, LPs’ increasing interest in direct investments may mean that there are storm clouds on the horizon for PE funds. There was $846 billion of PE dry powder as of March 2017, and “the more that LPs look to invest directly the more potential there will be for asset prices to rise and for deal opportunities to contract.”
This Vinson & Elkins memo provides a nice overview of the process of putting together a Special Purpose Acquisition Company (SPAC), financing it, and ultimately “De-SPACing” the entity through an acquisition. This excerpt from the intro summarizes the life cycle of a SPAC:
SPAC will go through the typical IPO process of filing a registration statement with the SEC, clearing SEC comments, and undertaking a road show followed by a firm commitment underwriting. The IPO proceeds will be held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO. Offering expenses, including the up-front portion of the underwriting discount, and a modest amount of working capital will be funded by the entity or management team that forms the SPAC (the “sponsor”). After the IPO, the SPAC will pursue an acquisition opportunity and negotiate a merger or purchase agreement to acquire a business or assets (referred to as the “business combination”).
If the SPAC needs additional capital to pursue the business combination or pay its other expenses, the sponsor may loan additional funds to the SPAC. In advance of signing an acquisition agreement, the SPAC will often arrange committed debt or equity financing, such as a private investment in public equity (“PIPE”) commitment, to finance a portion of the purchase price for the business combination and thereafter publicly announce both the acquisition agreement and the committed financing.
Following the announcement of signing, the SPAC will undertake a mandatory shareholder vote or tender offer process, in either case offering the public investors the right to return their public shares to the SPAC in exchange for an amount of cash roughly equal to the IPO price paid. If the business combination is approved by the shareholders (if required) and the financing and other conditions specified in the acquisition agreement are satisfied, the business combination will be consummated (referred to as the “De-SPAC transaction”), and the SPAC and the target business will combine into a publicly traded operating company.
One of the big reasons that deals get structured as asset purchases is that this structure allows the buyer to pick & choose which liabilities it is willing to accept as part of the deal. However, application of successor liability doctrines can sometimes result in an asset buyer being on the hook for a pre-deal liability even if it didn’t sign up for it in the purchase contract.
This McGuire Woods memo reviews recent cases dealing with the application of successor liability to asset buyers for liabilities associated with a seller’s decision to withdraw from multi-employer pension plans. This excerpt discusses a recent 9th Circuit decision that illustrates the role that policy considerations play when it comes to assessing successor liability under federal statutes:
In Heavenly Hana LLC v. Hotel Union & Hotel Indus. of Haw. Pension Plan, the U.S. Court of Appeals for the Ninth Circuit held that constructive notice is sufficient to impose successor withdrawal liability. There, a private equity group purchased the assets of a company that operated a hotel. Pursuant to collective bargaining agreements (CBAs) between the seller and the hotel workers’ union, the seller was obligated to contribute to an MEP. Post-closing, the buyer continued operating the hotel. However, instead of adopting the seller’s CBA with the union, it negotiated its own benefit plans without continued MEP participation. The MEP assessed the seller’s $757,981 withdrawal liability on the buyer as the seller’s successor, and the buyer filed suit to contest its responsibility for the withdrawal liability.
Since the buyer continued operating the hotel, the first requirement for successor liability (i.e., sufficient continuity of operations) was not in dispute. Instead, the parties argued over whether the buyer needed “actual notice” of the withdrawal liability, or whether “constructive notice” was sufficient. Based on the purpose and history of the Employee Retirement Income Security Act (ERISA) and the Multiemployer Pension Plan Amendments Act (MPPAA), the Ninth Circuit reasoned that such laws were intended to be liberally construed in favor of protecting participants, and that a constructive notice requirement was consistent with this approach.
While policy considerations made it easier for a plaintiff to establish successor liability in Heavenly Hana, that isn’t always the case. For instance, the memo also reviews a recent Bankruptcy Court decision refusing to impose MEP plan withdrawal liability on a good faith buyer in a Section 363 sale under the Bankruptcy Code. In that case, the importance of the Bankruptcy Code’s policy to provide a Section 363 buyer with “free and clear” title to the assets acquired overcame competing policy concerns under ERISA & MPPAA.
When dealing with federal statutes, it’s important to keep in mind that because of the prominent role that policy considerations play, analyzing the risk of successor liability under them solely by reference to traditional common law doctrines may not be sufficient.
Earlier this week, I blogged about how activist strategies are evolving to target different parts of a company’s capital structure. This Wachtell memo discusses an example of just such a strategy – “net short” debt activism. This excerpt summarizes how it works:
The playbook of the net-short debt activist starts with the investor identifying a transaction, no matter how old, that it can claim did not comply with a covenant in an issuer’s debt documents. Next, the investor amasses both a short position in the company’s debt (in some cases through a credit default swap that collects upon a default) and a long position in the debt, albeit one that is smaller than the short position, so the investor is “net short.” The investor, finally, asserts the alleged default, often in a public letter; and if its long position is large enough (usually 25 percent of a bond tranche), it can also serve a formal default notice, triggering a high-stakes litigation.
Net-short debt activism can be highly effective, in part because of the asymmetric risk that it presents to the target company. Even without a formal notice of default, a public letter asserting a covenant violation can by itself increase the value of a short position and affect the target company’s ability to transact in the markets. And once a notice of default is served, the company has the burden of going to court to demonstrate that no default has occurred.
The memo notes that this strategy can really throw sand in a company’s gears – not only is it exposed to claims from the activist based on alleged defaults, but the allegations may raise the specter of cross-defaults and make counterparties hesitant to deal with the company until the situation is resolved.
Yesterday, President Trump signed into law the Foreign Risk Review Modernization Act – which is intended to strengthen the ability of the Committee on Foreign Investment in the United States (CFIUS) to address national security risks posed by certain foreign investments. Here’s an excerpt from this Latham memo summarizing the statute’s key provisions:
– The new legislation extends CFIUS’ jurisdiction to cover non-controlling investments in the areas of critical infrastructure, critical technology, and sensitive personal information.
– The new law alters CFIUS review procedures, authorizes filing fees, and provides for greater resources for CFIUS that may allow for both increased flexibility regarding mitigation and for more active monitoring of transactions not filed.
– The new law requires certain foreign investments in the United States to be submitted to CFIUS for review.
– Forthcoming regulations will determine crucial details of the new law’s implementation, including the regulatory specification of statutory terms such as “emerging and foundational technologies,” relevant to the jurisdictional boundaries of the new law.
Here’s a recent memo from Kirkland & Ellis on how activist tactics continue to evolve in response to more sophisticated corporate defensive strategies and the entry of new activist funds. This excerpt reviews how activists may target different parts of a company’s capital structure:
With the multitude of securities and undisclosed derivatives available for investment and hedging up and down the capitalization structure, activists are increasingly using various entry points to deploy activist measures in situations where their true economic motivations may not be evident. For example, debtholders with economic positions designed to profit from a default in a company’s debt (i.e., through credit default swaps) are more frequently threatening to assert a default directly.
Strategies include raising the possibility of tripping the change of control covenants by buying up large equity stakes on the cheap, acquiring a position sufficient to block a shareholder vote for a transaction necessary to stave off insolvency, or,as Aurelius is pursuing at Windstream, formally asserting a technical covenant default on a transaction approved and consummated years ago. While the CFTC has publicly suggested that other strategies involving a company and creditor “manufacturing” a default designed to trigger credit default swap payments to the creditor may constitute market manipulation, we expect continued creativity from activist investors seeking to profit from their varied and hedged debt and equity positions.
The memo also says that activists are more often pursuing proxy contests for board control, rather than running a short slate of one or two nominees. They are also increasingly willing to use “withhold campaigns” to address events arising after director nomination deadlines, and are using ESG-based strategies to increase their support among passive investors.
Last October, we blogged about a Nasdaq proposal to ease the listing requirements for SPACs. The NYSE put forward a similar proposal in November. However, This Olshan blog says that the exchanges have backed off those rule proposals. Here’s the intro:
Last month, both the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) withdrew proposals that sought to ease the listing rules for blank check companies, also known as special purpose acquisition companies or SPACs. The proposals would have, among other things, reduced the minimum number of round lot holders (holders of 100 or more shares) required for initial listing from 300 to 150. Each Exchange also wanted to eliminate the continued listing requirement of at least 300 round-lot holders that applies until the SPAC makes one or more acquisitions. Nasdaq first submitted its proposal in September 2017 and the NYSE submitted its proposal in November 2017.
The Securities and Exchange Commission (SEC) had sought additional analysis for both proposals. The round-lot requirements are intended to ensure that public companies have a sufficient investor base to permit stable trading while limiting price volatility. The SEC requested additional information from the Exchanges to confirm that the proposals would not upset this balance. Neither Exchange offered an explanation as to why it withdrew its proposal.