Keith Bishop recently blogged about the rather unusual governing law section of Overstock.com’s asset purchase agreement with Houserie. What’s so odd about it? This:
Overstock.com, Inc. is an on-line retailer with its principal executive offices located in Midvale, Utah. Earlier this month, Overstock.com announced that it had agreed to buy the assets of Houserie, Inc. Both companies are incorporated in Delaware and the asset purchase agreement provides that the closing will occur in Utah.
The asset purchase agreement provides that it “shall be governed by and construed in accordance with the internal laws of the State of Utah without giving effect to any choice or conflict of law provision or rule, except to the extent that the Laws of the State of Delaware or California are mandatorily applicable”. How is it possible for California law to govern?
The blog says that the culprit is Section 2115 of the California Corporations Code, better known as the “pseudo-foreign corporation” statute. Section 2115 is complex, but its applicability generally depends on whether a company does most of its business in California and on whether a majority of its shares are owned by California residents.
The statute’s potential applicability mattered in this deal because the seller’s major shareholder was also one of the buyer’s executive officers – and if the pseudo-foreign corporation statute applied, the transaction would be subject to the heightened shareholder approval requirements applicable to entities under common control pursuant to Section 1001(d) of the California Corporations Code.
Since there were uncertainties about the potential application of the statute, these two Delaware corporations agreed to comply with the heightened approval requirements imposed under California law for their deal in Utah.
Stockholders’ agreements are usually the cornerstone of governance arrangements between private company investors, but cases involving them don’t happen every day. So, when the Chancery Court issues opinions interpreting them, it’s newsworthy. Here’s the intro to this Wilson Sonsini memo:
The Delaware Court of Chancery recently issued two important decisions addressing the interpretation and effects of stockholders’ agreements. In Schroeder v. Buhannic, the Court of Chancery refused to interpret a stockholders’ agreement in a manner that would allow a corporation’s common stockholders to remove the chief executive officer. In Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings,Inc., the Court of Chancery held that a corporation’s purported restricted stock issuances were invalid, where the corporation failed to comply with provisions governing stock issuances in a stockholders’ agreement to which the corporation was a party.
These two decisions are noteworthy statements of both the potential limitations and potency of stockholders’ agreements. As often occurs, these decisions also both arose in the context of disputes between factions of stockholders over control of the company—an important reminder about the implications of these issues.
If you’re doing a spin-off or divestiture involving a portion of your business, the rules surrounding “carve-out” financial statement requirements can add a significant degree of complexity to your process. This PwC memo provides guidance on how to prepare these financial statements. This excerpt is from the intro:
Carve-out financial statements refer to separate financial statements that are derived or “carved-out” from the financial statements of a larger entity. They can be prepared for a variety of purposes; e.g.,—to comply with a buyer’s requirement to furnish audited financial statements of an acquired business under Rule 3-05 of Regulation S-X; as the predecessor to the registrant in an initial public offering (“IPO”) of securities or spin-off from a parent company; or to satisfy financing requirements of a buyer.
These financial statements should reflect the historical operations of the carve-out entity on a stand-alone basis. Unfortunately, they frequently do not exist and need to be prepared for the specific objective. If financial statements do exist, they may not fully reflect the total cost of doing business.
As noted, there is very little authoritative guidance for preparing carve-out financial statements. As a result, judgment is needed in many areas, such as impairment and valuation allowance assessments, corporate overhead, deferred taxes, among other items, to reflect the objectives of the accounting literature and present financial statements of part of an entity.
The memo addresses some of the challenges facing companies when it comes to determining which asset, liability, & expense items should be included in the carve-out financial statements, and also touches on parent company reporting issues associated with a carve-out.
This Norton Rose Fulbright blog wrestles with the question of whether the notice provisions contained in M&A agreements should provide for notice by email – and how to treat notices received by email when the agreement doesn’t expressly provide for it. This excerpt addresses the latter scenario:
In the second scenario – where a party sends a notice via email, despite the notice provision having stipulated otherwise – the question of whether an email will constitute “good notice” depends on the interpretation of the notice provision as permissive or mandatory. As a general rule, notice clauses in a contract must be strictly complied with. Therefore, if the clause uses language such as “must” or “shall”, delivery by email will be ineffective notice, even if the email was received.
On the flip side, courts will permit email notice if the clause is permissive rather than mandatory. The notice provision will likely be viewed as permissive where it does not prohibit email, using language such as “may”. In the case of a “permissive” notice clause, the ultimate test will be whether email delivery is “no less advantageous” to the recipient than the method specified in the agreement.
Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Jason Alexander of Okapi Partners, Tom Johnson of Abernathy MacGregor and Damien Park of Spotlight Advisors identify who the activists are – and what makes them tick.
Working capital adjustments are often some of the most heavily negotiated provisions of private company acquisition agreements. This excerpt from a recent FEI blog discusses some of factors that parties should take into account in developing their negotiating positions:
– First, analyze the actual historical monthly working capital; start with the trailing twelve months from the most recent month-end closing. Because most transactions are “Cash Free Debt Free”, cash and funded debt (interest bearing debt) are excluded from the working capital calculation.
– If you are on the sell-side of the transaction, look for opportunities to normalize the historical numbers on the balance sheet giving consideration to what the buyer is likely to experience post-closing and accounting for income statement normalizations. For example, consider excluding certain one-time extended accounts receivable balances if those terms will not exist for the buyer.
– If there are extended (or stretched) accounts payable, the amounts of these accounts may look like funded debt to the buyer and become the responsibility of the seller at closing …resulting in reduced cash to the seller. A seller can defend against this claim if the vendor agrees to provide those terms extended terms permanently.
– Keep in mind that customer deposits for future work are usually carved-out as an exception to the Cash Free Debt Free concept …the seller is expected to leave cash in the business to cover those amounts. A possible solution to minimize the impact to the Seller of this cash exception, is to look for opportunities to reduce the deposit amounts where there may be work in process that has occurred but not been recognized… and then making the recognition.
– For software or subscription based businesses, start the analysis by excluding deferred revenue. A compromise in the negotiation is to accrue the estimated cost of services in the future needed to support the operational commitment created by having those deferred amounts.
– There are three time-based variables that can impact the working capital calculation in some deals: (a) the period used for analyzing and determining the working capital target, (b) the number of days in aging accounts receivable in which the buyer will not recognize the value of invoices, and (c) the number of days in accounts payable that the buyer will consider those invoices as effectively funded debt. For each of these, analyze the numbers in comparison to both historical norms and industry norms to determine opportunities to create an argument for exceptions that will reduce the required level of working capital.
Delaware courts have repeatedly stressed the fact-specific nature of appraisal proceedings, and they’ve just provided another example of that. Shortly after Vice Chancellor Laster went all-in on the target’s “unaffected market price” as the proper measure of fair value in Aruba Networks, Vice Chancellor Glasscock addressed the fair value issue in In re Appraisal of AOL Inc. (Del. Ch.; 2/18).
As this recent blog from Steve Hecht & Jonathan Kass notes, in contrast to other recent decisions, Vice Chancellor Glasscock decided that the much-abused discounted cash flow analysis produced the best measure of AOL’s fair value:
On Friday, Vice Chancellor Glasscock issued his ruling in the AOL appraisal case. The court first set out to determine whether the merger transaction was “Dell Compliant,” which the Court defined to be “[w]here information necessary for participants in the market to make a bid is widely disseminated, and where the terms of the transaction are not structurally prohibitive or unduly limiting to such market participation.”
Where those factors are present, “the trial court in its determination of fair value must take into consideration the transaction price as set by the market.” The Court then concluded, however, that the deal process in AOL was not “Dell Compliant” and relied entirely on a discounted cash flow analysis to award petitioners $48.70, or 2.6% below merger price.
So, congrats to DCF on the big win – for the time being, it looks like you’ve avoided being appraisal’s answer to my Cleveland Browns.
It’s been an active couple of weeks in Delaware appraisal cases, with three decisions – including a summary order from the Delaware Supreme Court – signing off on different valuation approaches that pegged fair value below the merger price. Check out this Wachtell Lipton memo for an overview of recent case law and what those decisions may mean for appraisal going forward.
This Morrison & Foerster memo reviews how the inflow of cash that many corporations are receiving as a result of tax reform may prompt more investor activism. This excerpt says that the bottom line is that activists know companies are flush with cash – and they want a big slice of it:
Though all the effects of the Act will not be known for years, it is clear that the amount of cash on company balance sheets will substantially increase. Numerous companies have announced employee bonuses, 401(k) contributions, and other compensation increases. Others have announced significant growth initiatives. Even with these announcements, U.S. companies will face a high-class problem: What should they do with the extra cash?
Capital allocation—specifically the use of “surplus” cash—has always been a focus of activist investors, who typically encourage its return to shareholders. Indeed, capital allocation has been a campaign target of many activist campaigns. We therefore anticipate activist investor campaigns based on capital allocation to increase in the coming year.
In order to successfully deal with activist campaigns & preserve the flexibility to use this cash in support of corporate strategies, the memo says it’s essential for companies to align closely with their long-term institutional investors. It also offers suggestions on how to accomplish that objective.
In order to cleanse a transaction with a controlling stockholder under Delaware’s MFW doctrine, the deal must be conditioned upon approval by an independent committee & an uncoerced majority of the minority shareholder vote ab initio – from the beginning.
The plaintiffs alleged that the transaction did not satisfy the ab initio requirement under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014), because the controller group did not initially condition the proposed transaction on recommendation by a special committee and approval by a majority of the disinterested stockholders, features added weeks after the controller’s initial proposal letter and after the Synutra board had already met and formed a special committee. Finding that “the controller announce[d] the conditions before any negotiations took place,” the Court held the ab initio requirement was satisfied and dismissed the complaint under MFW.