DealLawyers.com Blog

We have posted the transcript for our recent webcast: “Activist Profiles & Playbooks.”

– John Jenkins

Antitrust regulators recognize that companies considering an M&A transaction have a legitimate need to share detailed business information during the due diligence and negotiation process.  But information about prices, costs, strategies and certain other matters may be competitively sensitive – and “oversharing” can get companies into hot water with the DOJ & FTC.

In order to help companies stay onside, the FTC recently blogged guidance – I love that they blog guidance – about how to avoid potential problems with information sharing during a transaction.  This excerpt addresses setting up and managing the information sharing process:

Antitrust counsel can undertake several steps to help prevent problematic information sharing. First, companies should be reminded that designing, maintaining, and auditing effective protocols to prevent anticompetitive information sharing are extremely important during pre-merger negotiations and due diligence. If competitively sensitive information must be exchanged for diligence and integration planning purposes, parties should employ third-party consultants, clean teams, and other safeguards that limit the dissemination and use of that information within the parties’ businesses. Clean teams should not include any personnel responsible for competitive planning, pricing, or strategy.

Second, antitrust counsel should ensure that merging parties follow whatever protocols they establish. Merging parties’ adherence to established protocols should be monitored with an eye towards identifying potentially problematic information sharing or sloppy information sharing practices.

Finally, if antitrust counsel discovers any problematic document sharing or coordination of business activities between the merging parties during the HSR waiting period, counsel should instruct the parties to stop the activity or document exchange immediately (because that is what the FTC staff will insist upon). For any problematic documentary information exchange uncovered, antitrust counsel should determine whether and how the information was used as well as the extent of the information exchanged, and would be well advised to inform FTC staff about this before staff discovers the documents in the merger investigation.

The FTC also provides suggestions that both providers and recipients of information as to how they can properly safeguard competitively sensitive information shared during due diligence and negotiation.  It also reminds parties that the issues about information sharing don’t end until the deal is closed.

– John Jenkins

In today’s highly-competitive M&A market, private company buyers are sometimes faced with a choice – either pay the price for an R&W insurance policy, or live with no post-closing recourse for breaches of reps and warranties.

This Weil Gotshal blog lays out some of the factors that buyers should keep in mind in making this decision – and says that, despite the rapid growth in the use of R&W insurance, it might not always be the right choice for every buyer. Here’s an excerpt:

Repeat buyers such as private equity sponsors may question the value of obtaining R&W insurance in a particular transaction, particularly if they have done so frequently in past transactions but have not submitted (or received payment for) many claims. The initial outlay of premium and costs required to procure the insurance, coupled with the retention and potential exclusions may cause buyers (particularly those with large, diversified acquisition portfolios) to prefer to retain the risk of losses resulting from seller rep breaches by self-insuring.

An obvious risk of self-insuring is an unexpected, catastrophic loss that materially diminishes the value of the buyer’s investment – the type of loss that R&W insurance is essentially designed to cover. Ultimately, the question devolves into a commercial, risk-tolerance and cost-benefit-analysis that each buyer must perform on a case-by case basis.

– John Jenkins

So the business marriage that you hoped would be like Paul Newman & Joanne Woodward’s turned out to be more like Kris Humphries & Kim Kardashian’s?  This recent blog from Francis Pileggi says if you’re a Delaware corporation, there’s no need to go to Vegas to quickly untie the knot – just head to the Chancery Court.  Here’s the intro:

Delaware law allows for a summary proceeding to seek a quick business divorce in certain circumstances. Section 273 of the Delaware General Corporation Law allows for, in essence, a no-fault business divorce if the criteria of the statute are met. Those requirements are that: (i) there are two 50/50 stockholders; (ii) they must be engaged in a joint venture; and (iii) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.

If those prerequisites are met, one of the 50% stockholders can file a petition to dissolve the corporation and request the appointment of a receiver. If the opposing party cannot agree within three months to a plan of dissolution, the court may then take action to appoint a receiver to oversee the dissolution.

The blog points to the Chancery Court’s recent decision in Feldman v. YIDL Trust,  (Del. Ch.; 3/18) as providing a good example of the set of circumstances that will satisfy the statutory prerequisites for this type of business divorce.

– John Jenkins

This WSJ article says that when it comes to settling with companies, activists don’t just want board seats. They want to make sure they’re represented on key committees – and when they say “key committees,” they usually mean the compensation committee.

When activist shareholders land in a boardroom, they often jockey for the committee seat with the most control over the top brass.

As activists increasingly wrangle with directors over board appointments, the most popular pick is the compensation committee, according to a Wall Street Journal analysis of significant settlements involving companies and activists between 2015 and 2017.

Because pay drives executive behavior, says longtime activist David Batchelder, a compensation committee role “is the only one that really counts.”

The WSJ analyzed 82 activist settlements at companies with $1 billion plus market caps, and found that 51 of them included specific committee assignments. Compensation committee assignments represented more than half of those 51 examples.  Not surprisingly, committees responsible for reviewing strategic alternatives are another sought after committee assignment among activists.

– John Jenkins

Earlier this year, I blogged about recent post-closing lawsuits brought by the DOJ & FTC alleging that the deals in question violated the antitrust laws. This Perkins Coie memo notes the rise in post-closing challenges to deals that flew under the HSR Act’s radar, and provides some tips on how companies can mitigate the risk of being on the receiving end of a lawsuit.

The memo lists several actions that buyers should take to mitigate the risk of a post-closing challenge to a deal – and this excerpt addresses the most important of those actions:

Finally, and most importantly, cultivate positive relationships with the acquired firm’s key customers. Post-closing investigations are typically a response to customer complaints. Because non-reportable deals are often signed and closed simultaneously, customers learn about them only after closing. Their response is the single most important factor in whether the government opens an investigation.

To prevail in a post-closing challenge, the government need not prove the buyer increased its prices after closing. Nevertheless, if a buyer increases those prices,it increases the likelihood of customer complaints and materially strengthens the government’s case if it decides to challenge the deal. Buyers should think long and hard before they do anything likely to turn long-standing customers into government informants.

Actions to help guard against possible post-closing challenges are essential. Post-closing investigations & lawsuits are lengthy, costly and – since they’re usually prompted by complaints from angry customers – usually result in a victory for the government.

– John Jenkins

Making sure that a seller’s key employees hang around to get a deal to the finish line – and sometimes beyond – is a high priority for both buyers & sellers.  This video presentation from Andrews Kurth Kenyon’s Tony Eppert addresses the business points associated with the structure of a management carve-out or change-in-control bonus plan when a deal is imminent.  We’ve also posted the slides in our “Change-in-Control” Practice Area.

– John Jenkins

Earlier this week, President Trump issued an unprecedented executive order blocking Broadcom’s hostile bid for Qualcomm due to national security concerns. This excerpt from a recent WSJ article explains what prompted the President’s actions:

While Broadcom is a Singapore-based company, the U.S. panel that vets foreign deals said that the bid could have had implications for the U.S.’s broader technological competition with China. That panel, the Committee on Foreign Investment in the U.S., known as CFIUS, said it was worried that Broadcom would stymie research and development at Qualcomm given its reputation as a cost-cutting behemoth. CFIUS said such a move could weaken Qualcomm—and thereby the U.S.—against foreign rivals racing to develop next-generation wireless technology known as 5G, such as China’s Huawei Technologies Co.

The president’s order marks the first time that a bid has been blocked in advance of a signed deal due to national security concerns. His action appears to have been precipitated by allegations that Broadcom violated an interim order issued by CFIUS last week prohibiting it from taking actions to redomesticate in the United States without giving CFIUS 5 business days advance notice. Broadcom’s move to the U.S. may have created jurisdictional issues that would have precluded CFIUS from reviewing the deal.

In a letter written to counsel for the two companies last week, CFIUS said that its national security concerns arose out of “risks associated with Broadcom’s relationships with third party foreign entities.” As this Bloomberg article explains, it was Broadcom’s ties to China’s Huawei Technologies that appear to have set off alarms at CFIUS.

The president’s unprecedented action is a reminder of CFIUS review’s potential use as a takeover defense.  In that regard, the role that CFIUS review played in the Broadcom/Qualcomm fight is reminiscent of the early ’90s heyday of “The Pentagon Ploy.”

– John Jenkins

This March-April issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a no-risk trial):

– Tax Reform’s Impact on Private Equity & M&A
– Delaware Supreme Court Reverses Controversial Dell Appraisal Ruling
– All Merger Side Letters Must Now Be Included in HSR Filings
– California Law Provides Private Company Dissolution Alternatives

Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

– John Jenkins

This Fried Frank memo reviews the Delaware Chancery Court’s recent opinion in Miller v. HCP (Del. Ch.; 2/18) – in which the Court refused to impose a duty on an LLC’s board to maximize value in a sale favored by its controlling member. Here’s an excerpt summarizing the case:

Under the LLC operating agreement’s “waterfall” provisions governing the allocation of proceeds on a sale of the company, the controller was entitled to receive almost all of the proceeds of any sale up to $30 million and almost none of any proceeds above that amount (which, the court acknowledged, created little incentive for the board to negotiate a price higher than $30 million).

The buyer initially offered $31 million and ultimately increased the price to $43 million (after the company had received a competing offer for $36 million and an unsolicited indication of interest that valued the company at $50-$60 million—neither of which the controller-allied board members pursued). Only $48,000 of the $13 million price increase was allocated to the plaintiff (who was a co-founder of the company), with the balance being allocated to other minority stockholders who had priority over the plaintiff in the waterfall. Under the waterfall, the plaintiff was entitled to an allocation of significant proceeds on a sale only if the price reached $60 million.

The plaintiff claimed that an open auction process would have resulted in a much higher sale price that would have made proceeds available to all of the Trumpet preferred unitholders. Although, under the LLC operating agreement, all fiduciary duties of the board to the LLC members and of the LLC members to one another were waived, and the board was granted “sole discretion” to approve a sale to an unaffiliated third party, the plaintiff contended that, based on the contractual implied covenant of good faith (which adheres to every contract and cannot be waived), the board was obligated to seek to maximize the price. The court disagreed and granted the motion of the controller and the controller-allied board members to dismiss the case.

While Delaware permits LLCs to waive fiduciary duties in their operating agreements, the implied covenant of good faith continues to apply to all contracts, including  LLC agreements.  But Vice Chancellor Glasscock noted that the covenant of good faith is a gap filler, and a court needs to determine whether there are any gaps to fill before invoking it. Citing prior Delaware authority, he concluded that there wasn’t one here:

“When an LP [or LLC] agreement eliminates fiduciary duties as part of a detailed contractual governance scheme, Delaware courts should be all the more hesitant to resort to the implied covenant.” The reason is that an alternative entity agreement that waives all fiduciary duties “implies an agreement that losses should remain where they fall” rather than being shifted after the fact through fiduciary duty review.

– John Jenkins