We’ve previously blogged about the increasing length of antitrust merger investigations – and the DOJ’s recent efforts to pick up the pace. According to this Dechert memo, there’s good news and bad news when it comes to the length of these investigations. Here’s an excerpt:
Significant U.S. antitrust merger investigations resolved in 2017 took longer than ever recorded—an average of 10.8 months from announcement to agency action—according to DAMITT, the Dechert Antitrust Merger Investigation Timing Tracker. The duration grew despite the number of significant U.S. merger investigations falling to 27, the lowest level since 2013. Yet there were signs that the Trump administration might be reversing what has been a trend toward longer antitrust merger investigations in the United States. The average duration of the 10 significant merger U.S. investigations related to transactions announced after 2016’s Presidential election, but resolved in 2017, was only 7.3 months.
Here’s where the EU stands on the timing of merger investigations:
New DAMITT analysis of European Union data found that the duration of significant EU antitrust merger investigations resolved in 2017 also grew, while their number decreased to 21, the lowest level since 2014. EU merger investigations that went to Phase II took an average of 15.1 months from announcement to clearance, also the longest on record in DAMITT’s analysis. The average duration of investigations cleared with remedies in Phase I was 7.0 months. These average durations, calculated to include the time taken for pre-filing discussions, tell a radically different story from the theoretically fixed schedule of EU investigations.
The memo goes on to provide details on 2017 merger investigations, their resolution, and the impact of their duration on the terms of acquisition agreements.
Tune in tomorrow for the webcast – “Auctions: The Art of the Non-Price Bid Sweetener” – to hear McDermott Will’s Diego Gómez-Cornejo, Alston & Bird’s Soren Lindstrom and Western Reserve Partners’ Chuck Aquino discuss how non-price bid sweeteners move the needle with private sellers in competitively bid deals.
“Carried interest” is the name given to a general partner’s right to receive a special profits interest in a fund – typically 20% of net profits – that is disproportionate to its capital. Historically, a general partner’s carried interest was taxed at capital gains rates, and not as ordinary income. Many thought that this tax preference was unfair, & some reform proposals called for its elimination.
That didn’t happen under the new tax act, but as this Nixon Peabody blog explains, the treatment of carried interest did become more complicated. Here’s an excerpt:
Congress settled on a provision that largely maintains the historical approach to carried interest tax treatment, and does not seek to re-characterize carried interest distributions to the general partner and its individual owners from capital transactions as ordinary income, so long as a new 3 year holding period is satisfied. The new law is unclear whether the new holding period applies to the investment assets of the partnership and/or to the carried interest held by the general partner and its individual owners.
In order to implement this new treatment, the Act introduces the concept of an “applicable partnership interest” (API) which includes partnership interests that are acquired or held by a taxpayer in connection with a trade or business that consists of the raising or returning of capital and either investment in or development of “specified assets.” Specified assets include investment assets, including securities, debt instruments, commodities, real estate held for rental or investment, cash, and options, among others.
Effective for gain recognized in taxable years beginning after December 31, 2017, the Act provides that carried interest allocated by a partnership to an individual partner will be characterized as short-term capital gain (and therefore effectively taxed at ordinary income rates) to the extent the gain is from the disposition of property in which the partnership’s holding period is less than three years in such property.
There remains much uncertainty about how this new carried interest regime will be implemented – and it is unclear as to whether state and local governments will fall in line with this approach.
Speaking of the states, this Jenner & Block memo says that at least some of them are fighting mad about the continued federal tax preference for carried interests, and are touting the idea of imposing their own “coordinated punitive taxes” on it. Stay tuned.
Survival clauses setting forth a date on which a parties contractual obligations under a purchase agreement will expire are pretty standard fare in M&A transactions. Dealmakers take their enforceability for granted, but it’s unusual to see a Delaware Chancery Court decision on this topic.
Francis Pileggi recently blogged about a decision from late last year – HBMA Holdings v. LSF9 Stardust Holdings, (Del. Ch.; 12/17) – in which Vice Chancellor Montgomery-Reeves was called upon to address the issue in the context of a dispute over an earnout. Fortunately, there were no surprises. Here’s an excerpt:
The facts of this case involved indemnification claims that were based on a contract. That contract provided that a notice of claims for indemnification needed to be made within 30 days of the matter giving rise to such a claim. The court found that the notice of claim was not given within that 30-day period.
The court explained that Delaware enforces shortened statute of limitations based on contracts if the period is considered reasonable. See footnotes 53 and 54. The court found that a provision in the contract in this case that notice of claims for indemnification needed to be made within 30 days was enforceable.
Referring to these types of contract provisions as “survival clauses,” the court explained that Delaware courts uphold unambiguous survival clauses that, in effect, serve as shortened statutes of limitations. The claim in this case was barred because the applicable 30-day period passed, and therefore the claim was barred. This decision and the explanation of the law it applies, has great relevance to many similar contractual provisions.
Another reason that the case is worth reading is for the insight it provides into how Delaware courts interpret a contract’s dispute resolution, indemnification, and notice requirements – all of which were at issue here.
Here at DealLawyers.com, we know for sure that spring’s coming when the law firm memos about the FTC’s new HSR filing thresholds for the year start to arrive. The swallows may not fly back to Capistrano on that day – but the client memos sure do fly out of America’s law firms by the hundreds!
This Davis Polk memo was the first one to hit my inbox this year. Here’s the intro:
Today, the Federal Trade Commission (FTC) announced revised Hart-Scott-Rodino Act (HSR) reporting thresholds under which transactions will be reportable only if, as a result of such transaction, the acquiring person will hold voting securities, assets, or non-corporate interests valued above $84.4 million, compared to $80.8 million in 2017. The newly adjusted HSR thresholds will apply to all transactions that close on or after the effective date, which is expected to be in late-February (the exact date will depend on when the changes are published in the Federal Register).
The FTC also announced revised thresholds above which companies are prohibited from having interlocking memberships on their boards of directors under Section 8 of the Clayton Act. The new Interlocking Directors thresholds are $34,395,000 for Section 8(a)(1) and $3,439,500 for Section 8(a)(2)(A). The new Section 8 thresholds become effective upon publication in the Federal Register.
This Fried Frank memo discusses the Delaware Chancery Court’s recent decision in Greenstar IH Rep v. Tutor Perini (Del. Ch.; 10/17) – in which the Court rejected a buyer’s efforts to avoid earnout payments based on allegations that the seller’s former CEO was providing fraudulent information to inflate those payments.
Vice Chancellor Slights held that the buyer could not withhold payments based on alleged wrongdoing in the face of specific contract language setting forth the procedure for determining the earnout payment, and providing that the amount determined in accordance with that procedure “shall be binding” on the parties absent a timely objection by the seller.
The memo reviews the Chancery Court’s decision, and provides an overview of Delaware’s approach to earnouts in general & the key lessons drawn from the case. Here’s an excerpt about how buyers can address the potential leverage that sellers’ might enjoy over the potential earnout payment through their continued participation in the business:
A buyer should consider ways in which a seller may have the practical ability to exert pressure on the buyer to make earnout payments—even if earnout targets are clearly not met and there are no issues about the buyer’s post-closing actions. For example, a seller, if it continues to play a major role in the company post-closing, may be able to exert influence on customers and suppliers or other aspects of the operations, or to trigger negative publicity about the financial situation of the business. (Indeed, a seller may itself also be a customer of or supplier to the acquired business.)
Buyers should consider specific covenants relating to post-closing actions by the seller or persons who will benefit from the earnout payments. These could include, for example, specified consequences relating to the earnout if a person who will benefit from earnout payments competes during the earnout period.
The memo also points out that while earnouts remain a very popular way to bridge valuation gaps, they’re also a frequent source of post-closing disputes. Hey, wait a minute – I think I’ve heard that somewhere before. . .
I never used to listen much to podcasts – that is, until I taped a few of them with Broc and ended up getting hooked on listening to them. Now, I can’t even think about going on my morning walk without downloading a couple for the road – usually something from the BBC’s vast “In Our Time” collection or, more recently, Slate’s “Slow Burn.”
If you’re looking for podcasts with an M&A focus, check out “Fully Invested” – a series of podcasts from the investment bankers at Western Reserve Partners. It’s designed for middle market business owners & decision-makers looking to buy or sell a business. Individual episodes cover topics such as valuation, how to approach potential buyers, price negotiations, pitfalls for buyers to avoid & the art of closing a deal.
If you’re interested in podcasts covering a wide variety of topics of interest to corporate lawyers, be sure to check out the extensive collection in our “Inside Track with Broc” series over on TheCorporateCounsel.net.
This Potter Anderson memo discusses the Delaware Supreme Court’s recent decision in CALSTRS v. Alvarez (Del.; 1/18) – in which the Court affirmed an earlier Chancery Court decision holding that derivative claims filed by Walmart stockholders in Delaware were precluded because a federal court in Arkansas had already dismissed a derivative complaint filed by different Walmart stockholders for failure to satisfy the demand requirement.
We’ve previously blogged about this case – and pointed out that some commentators suggested that the Supreme Court might act to prevent derivative plaintiffs in M&A cases from scurrying to other jurisdictions that aren’t as insistent on pre-suit books & records demands as Delaware has been. But as the memo notes, that didn’t happen:
On appeal, the Supreme Court directed the Court of Chancery to reconsider the Due Process implications of giving preclusive effect to the dismissal by the Arkansas federal court. In answering the question posed by the Supreme Court, the Court of Chancery concluded that the Delaware plaintiffs’ Due Process rights were not violated under existing law, but nonetheless recommended that the Supreme Court adopt a rule that would not give preclusive effect in Delaware to prior dismissals based on demand futility.
In so recommending, the Court of Chancery relied on the then-recent decision in In re EZCORP Inc. Consulting Agreement Derivative Litigation, 130 A.3d 934 (Del. Ch. 2016), which suggested in dicta that, as a matter of Delaware law and Due Process, a derivative plaintiff may not bind a later derivative plaintiff unless and until the first derivative plaintiff survives a motion to dismiss, or the board of directors has given the plaintiff authority to proceed by declining to oppose the suit.
The Supreme Court declined to adopt the Court of Chancery’s recommendation, however, and instead affirmed the Court of Chancery’s original decision to dismiss the Delaware action on the basis of collateral estoppel. The Supreme Court concluded that, under existing federal Due Process law, an exception to the general rule against nonparty preclusion was appropriate because the interests of the plaintiffs in Arkansas and Delaware were sufficiently aligned and the Arkansas plaintiffs were adequate representatives, despite their decision not to seek books and records.
This recent blog from Francis Pileggi suggests one possible result of the Court’s decision:
A cynical wag might conclude that an unintended consequence of this decision will be to encourage some plaintiffs to file stockholder suits in courts “anywhere but Delaware” without the added expenditure of time and money using the tools of Section 220 before filing their plenary complaint.
Count me among the cynical wags – if you’re a plaintiff, why file in Delaware if it will give collateral estoppel effect to a judgment from a less burdensome jurisdiction?
This Norton Rose Fulbright blog reviews the vital role that effective “change management” plays in integrating an acquired business. Here’s an excerpt from the intro:
Successfully directing the integration of two businesses following the closing of an M&A transaction is vital to realizing the value of a merger. The process by which post-closing change within a business is overseen – often referred to as “change management” – plays a key role in determining whether or not the integration process is smooth and the objectives of the merged entity are achieved.
According to a report by Bain & Company, people, culture, change management and communication have been identified by business leaders as some of the main causes of poor integration following an M&A transaction. Although executives often intend to devote a significant amount of attention to properly managing change in the aftermath of a merger, these aspirations are easily overshadowed by the resources and focus required to meet the day to day needs of the business.
The blog discusses specific actions that should be taken to address change management issues in the integration process.
Effective January 1st, Section 432.3 of California’s Labor Code was amended to prohibit employers from seeking salary & compensation history from applicants for employment, and to require employers to provide applicants with the pay scale that applies to the position they’re seeking.
This Orrick memo says that these amendments have some important implications for M&A transactions. Here’s an excerpt:
Buyers and sellers alike will need to think carefully about the potential application of these new requirements within the M&A context – where oftentimes employees of the target company may continue their positions, but as new employees of the buyer. In particular, buyers should consider evaluating their current approach to HR diligence.
If a buyer intends to inherit all employees of the seller, it may posit that none of these employees are “applicants” covered by the new statute. However, in almost all acquisitions, there is an element of uncertainty with respect to at least some positions. Accordingly, buyers should be mindful of the overall structure of the acquisition, particularly in situations where acquired employees may be regarded as job applicants.
The memo goes on to offer specific tips for addressing the issues raised by the new law during the due diligence process – and flags a couple of other recent changes in California employment law to keep in mind.