– Locked box was used in 25% of all deals across Europe and was particularly popular in larger deals;
– Earn-outs remained a popular feature, especially in Benelux, German-speaking countries and Southern Europe with longer earn-out periods and more turnover-based earn-outs than previously;
– Baskets and de minimis provisions were less frequent due to nominal liability caps in deals featuring W & I insurance making them redundant;
– W & I insurance usage is at an all-time high, especially in deals exceeding EUR 25m;
– Liability caps are getting lower, especially in the bigger European jurisdictions, mainly as a result of W & I insurance;
– Limitation periods are not getting any longer, with the majority operating in the one- to two year range;
– Security for warranty claims is less frequent than it was a decade ago, with escrow accounts being very much the favoured alternative when there is security;
– MAC clauses have never been rarer in Europe;
– Arbitration regained some of its popularity with a notable trend emerging in favour of international rather than national rules where applicable.
Recently, a member posted this in our “Q&A Forum” (#402):
My client is a CEO of a public company that is being acquired by another public company in an all-stock transaction. The CEO will become a director of the acquiring company and has a desire to sell some of the CEO’s rather sizable equity holdings. The CEO would like to adopt a 10b5-1 plan to sell the shares and is wondering whether the plan can be adopted prior to closing.
I haven’t found any guidance on this issue – from off-the-shelf materials to SEC guidance – one way or another. The CEO’s broker hadn’t encountered this situation before, but the broker is with a small firm (vs. an investment bank), so the sample size is likely small. The legal argument against adopting before closing is that the SEC could view the closing in and of itself as a modification of the plan. I view the “closing as a modification” argument as quite conservative, especially if the trading triggers are straightforward (e.g., sell X shares per month, subject to a floor).
If anyone has encountered this situation before, have you found any sort of guidance on the issue? Or perhaps even have publicly-available examples (e.g., Section 16 notes, etc.)?
John responded with:
I’ve not seen anyone do something like this. The period between signing and closing a merger seems to me to be a very risky time for the CEO of the seller to adopt a 10b5-1 plan. There are simply too many moving pieces in a pending deal and it is easy to second guess whether the insider was in possession of MNPI at the time of the plan’s adoption.
This Sidley memo (pg. 4) says closer national security scrutiny of deals involving foreign buyers isn’t just a U.S. phenomenon – the EU and several European nations are taking a harder look as well. This excerpt provides an overview of recent actions:
Consistent with recent trends in the United States, the European Union (EU) and many national governments in Europe are expressing renewed interest in greater scrutiny of acquisitions by foreign investors. Government ministers in Germany recently opposed a takeover in the robotics industry by a Chinese bidder, while government ministers in the Netherlands recently opposed a takeover in the pharmaceutical industry by an American bidder.
Similarly, a number of governments in Europe have recently taken steps to reform national rules in order to increase their powers to scrutinize foreign takeovers. In total, 12 of the 28 EU Member States operate regimes for the review of foreign direct investment, or FDI. The number of prohibitions has historically been low, but new rules are widening the scope for intervention.
For example, France, whose FDI regime already covers acquisitions affecting national security or concerning the supply of energy, water, transport, telecommunications and public health, is now proposing coverage of artificial intelligence and digital technology.
Other jurisdictions have opted instead to expand the scope of review by their competition authorities Germany and Austria, for example, recently introduced new thresholds into their merger control regimes which are designed to extend their jurisdiction to review acquisitions of data-rich targets in the technology and life sciences sectors.
These trends are expected to result in an increase in the overall number of deals reviewed, and are also expected to result in technology & data-related deals being subjected to both competition and national security review.
Common law “quasi-appraisal” claims have become more common in Delaware M&A litigation, and this Blank Rome memo says that the increasing prevalence of these claims could alter the risk profile of deals. This excerpt summarizes how quasi-appraisal actions change the potential liability landscape:
While the amount involved can be high, appraisal actions are typically limited to a small percentage of stockholders. Only stockholders who timely perfected their appraisal rights are permitted to obtain an award of “fair value” instead of the merger price (and of course, “fair value” could be less than the merger price—a risk many stockholders are unwilling to take). If “fair value” is determined by the court to be higher than the merger price, the buyer is responsible to make those additional payments to the dissenting stockholders. As such, the statutory threshold for the perfection of appraisal rights can provide a buyer with a level of risk predictability in a transaction.
But, what about when, for whatever reason, stockholders do not timely perfect appraisal rights under Section 262? Can such stockholders use the concept of quasi-appraisal as a substitute for appraisal? In such a quasi-appraisal claim, a stockholder can bring a claim (likely dressed up as a breach of fiduciary duty claim, i.e., not enough information provided to allow one to make a decision on the exercise of appraisal rights) without the need to exercise appraisal rights under the statute.
Because quasi-appraisal is rooted in fiduciary duty actions, directors/former directors are typically the target of such actions and may be on the hook for any difference in the merger price and the determined “fair value.” Quasi-appraisal actions are often pursued as class actions on behalf of most of the stockholders, meaning directors may face crushing personal liability if the court were to find liability and award quasi-appraisal damages.
The memo points out that continued growth in quasi-appraisal claims may result in a much less predictable environment than the one typically experienced when dealing with traditional appraisal claims. Instead of a limited number of dissenters, buyers may find themselves facing post-closing class actions alleging breaches of fiduciary duty by the sellers board. In many instances, the buyer will have indemnity responsibility for these claims.
We’ve previously blogged about the bipartisan push for CFIUS reform legislation & the Trump Administration’s initiatives to impose greater restrictions on Chinese investments in U.S. companies. This O’Melveny memo says that both of those efforts continue to move forward.
Earlier this week, the White House announced the President’s decision to implement “investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology” – with specific actions to be announced by the end of June. At almost the same time, CFIUS reform legislation – The Foreign Investment Risk Review Modernization Act, or FIRRMA – was unanimously approved by the Senate Banking Committee & the House Financial Services Committee.
The memo says that both FIRRMA & the new restrictions on Chinese investment are expected to be in place by August. This excerpt says that their combined effect will represent a substantial change in US policy toward foreign investment:
Individually or in combination, the White House action and FIRRMA will mark a pronounced — and probably permanent — departure from the 225-year-old US policy of welcoming foreign investment except in narrow circumstances. By highlighting “industrially significant,” “emerging,” and “foundational” technologies as specially under CFIUS protection, the government will assume broad new regulatory authority that will set the stage over the long term for future investment controls based more explicitly on economic policy and public interest concerns.
More immediately, implementation of the new authorities will significantly impact the financing and exit strategies of early stage US companies, as well as M&A and development partnership transactions involving mature companies, that possess technologies fitting the new designations.
The memo goes on to review the key components of the White House statement & the versions of FIRRMA that emerged from the House & Senate committees.
The UK’s decision to exit the EU put a damper on inbound M&A activity – with the dollar value of inbound deals declining from its 2015 peak of $341 billion to only $91 billion last year. However, this P.J. Solomon report says that the inbound M&A market in the UK appears to be stabilizing. This excerpt highlights this year’s activity:
– 2018 year-to-date UK inbound M&A has increased $170B compared to last year. Even excluding the 3 largest announced transactions YTD (Shire’s $81B bid for Takeda, Comcast’s $41B bid for Sky and Disney/Fox’s competing $37B bid forSky), UK inbound transaction volumes are still up $29.7B or 32.2% relative to last year.
– Foreign investment into the UK is being driven by greater comfort around Brexit and continued strength of global currencies relative to the British Pound (even despite the Pound’s recent run up)
– Overall, inbound M&A dollar volume has increased to 70% of all UK cross-border transactions, up from 57% in 2016. U.S. and Japanese companies have been the top bidders for UK targets in 2018, at $91B and $82B, respectively.
The report also covers other trends in global cross-border M&A, and provides a variety of data on YTD 2018 U.S. outbound & inbound activity.
Vice Chancellor Laster’s ruling earlier this year in the Aruba Networks appraisal case raised a lot of eyebrows. In that case, he determined that since the market for Aruba’s stock was efficient, the stock’s unaffected market value prior to the deal was the right approach for determining its fair value – even though neither of the parties argued for that approach, and even though it resulted in a value that was lower that the price that Aruba itself advocated.
As I blogged at the time over on “John Tales”, some even suggested a “Straussian” reading of the opinion. This interpretation holds that the Vice Chancellor was frustrated by the Supreme Court’s approach to appraisal in recent cases, and therefore his goal in Aruba Networks might have been “to embarrass the Supreme Court into reversing him again and admitting that markets aren’t that efficient.”
The plaintiffs seem to have incorporated this idea into their motion for reargument – suggesting at one point that the Vice Chancellor “misapprehended the law due to [his] ‘frustration with many of the Supreme Court’s pronouncements.'” That may not have been their best play, but this excerpt from his opinion denying the motion shows that it certainly got Vice Chancellor Laster’s attention:
The petitioners initially argue that I issued the Post-Trial Ruling as an act of political theater designed to show the Delaware Supreme Court the error of its ways. They sympathize that the Post-Trial Ruling must reflect my “frustration with many of the Supreme Court’s pronouncements,” only to posit that this frustration led me to pen a decision designed to show “the absurdity of the literal application of certain pronouncements made by the Supreme Court in Dell and DFC to appraisal actions.”
They conclude that I must be engaging in a “battle of legal titans” with the Delaware Supreme Court and that the emotional fervor of intellectual combat led me to impose an unjust ruling. The motion strives to remind me that the petitioners are not characters in an academic hypothetical but “real” litigants with “real dollars at stake” who should not be turned into “collateral damage.”
Laster went on to make it clear that he wasn’t buying any of this “political theater” argument:
For starters, I am not a legal titan. I am a state court trial judge. I personally do not think that the role of a trial judge accommodates active resistance to Delaware Supreme Court pronouncements. I rather view the job as calling for adherence to Delaware Supreme Court precedent. While I think it is fair game for a trial judge to suggest potential changes in the law, I do not believe that a trial judge has the flexibility to disregard the Delaware Supreme Court’s holdings, nor do I think that a trial judge should look for clever ways to evade their implications. When a new precedent arrives, I view my job as requiring that I update my understanding of Delaware law to incorporate the new precedent.
In fact, the Vice Chancellor wasn’t buying anything that the plaintiffs were selling – he reiterated that he meant exactly what he said in his prior opinion, and denied the motion for reargument.
Earlier this week, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which is intended to reduce the regulatory burdens imposed on financial institutions under Dodd-Frank. President Trump is expected to sign the legislation by Memorial Day. Although the legislation makes a number of changes to existing law, its most significant change is the increase in the threshold for designation of an entity as a “systemically important financial institution” (SIFI) from $50 billion to $250 billion in assets.
Financial institutions falling within the SIFI classification face particularly burdensome regulation, and this Wachtell memo says that the change in the SIFI threshold may result in a big upswing in financial institutions M&A. Here’s an excerpt:
The $50 billion threshold has been a powerful deterrent to bank M&A. Since the passage of Dodd-Frank in 2010, only one bank holding company has crossed the $50 billion threshold as a result of an acquisition – CIT through its acquisition of OneWest in 2015. As a practical matter, the $50 billion threshold even deterred mergers where the combined company would exceed $40 billion as the company would then have to demonstrate to its regulators its readiness to cross the $50 billion threshold. For banks above the $50 billion threshold, the complexity and uncertainties of the CCAR stress test also discouraged acquisitions.
The memo notes that the legislation comes at a time when other factors encouraging bank M&A are falling into place. These include a gradual easing of the regulatory environment by new leadership at the regulatory agencies, growing confidence that deals will receive regulatory approval, increasing competition for deposits & millenials’ preference for larger banks. All of these factors point to a significant increase in bank M&A.
This “Pensions & Investments” article says that CalSTRS can’t find any private equity funds that will take its money. This excerpt says the problem is California’s transparency legislation:
New transparency requirements and a seller’s market for private equity investments are putting California public pension funds at a disadvantage when seeking to invest.
CalSTRS and the Los Angeles Fire & Police Pension Plan are just two of the asset owners whose general partners have declined to accept their commitments, citing the state’s new law. The law requires all public pension plans in the state to obtain information about private fund fees and expenses, and to make that information public.
“We’ve lost three opportunities,” said Christopher J. Ailman, chief investment officer of the $222.5 billion California State Teachers’ Retirement System, West Sacramento, in an interview.
The situation is being aggravated by the enormous amount of money chasing the asset class, as investors look to alternative investments to produce returns not expected to be delivered by traditional asset classes.
California enacted legislation in 2016 mandating that California public investment funds disclose detailed information about the fees and expenses associated with investments in private equity, venture & hedge funds. At the time, some expressed concern about the impact the new disclosure requirements would have on California funds’ ability to access alternative investments. It appears that they had good reason to be worried.
This Shearman & Sterling memo notes that the proposed 2018 DGCL amendments would eliminate appraisal rights for 2-step stock-for-stock deals structured in conformity with Section 251(h). This excerpt explains that the amendment would accomplish this by extending Delaware’s “market out” to stock-for-stock exchange offers:
Delaware law does not provide dissenting shareholders with appraisal rights in transactions that are effected pursuant to a “long-form” merger (in which the target company calls a special meeting for purposes of obtaining shareholder approval), so long as the consideration paid to the target’s shareholders consists solely of stock that is listed on a national securities exchange or is held by more than 2,000 holders. This is the “market out” exception.
However, as currently written, Delaware law does not extend the “market out” exception to two-step mergers effected pursuant to §251(h), in which the target company is acquired without the need for a stockholder vote following a tender offer.
A proposed amendment to the DGCL on March 20, 2018 is designed to eliminate this inconsistency. Under the proposed amendments, the same “market out” exception that applies to long-form mergers would apply to short form mergers effected pursuant to §251(h) – i.e., in stock-for-stock deals.
It is very uncommon for stock-for-stock deals to be structured as 2-step transactions, and the memo speculates that the availability of appraisal rights may be one of the reasons. Plenty of impediments would nevertheless remain, including the need to register the shares to be issued & the delays associated with SEC review. Still, the memo suggests that the amendment could increase the utility of Section 251(h) in these transactions.