March 25, 2021

Antitrust: Make Sure the HSR Clock Has Started Running

Over on its “Competition Matters” blog, the  FTC recently provided some reminders to companies about the importance of making sure they’ve received official confirmation of their HSR filings.  This typically comes in the form of a “Waiting Period Letter,” and if you haven’t received one within a few days of filing, there may be a problem that you need to address.

The blog says that the Pre-merger Notification Office will only send Waiting Period Letters if both the FTC & DOJ have received complete filings from all parties. If your Waiting Period Letter appears to be delayed, there might be a filing deficiency needs to be addressed, or there may be problems with the filing fee.  The blog goes on to offer the following tips on making sure that the clock has started to run on your HSR filing:

– Until you receive a Waiting Period Letter confirming the dates, you should not assume that the waiting period is running or will expire on a certain day. Most of the time, the waiting period will start on the day the agencies receive the filing. Occasionally, if filing deficiencies are not cured promptly or for other reasons (as noted above), PNO staff must delay the start of the waiting period.

– You should not assume that the waiting period is running because the PNO has provided you the transaction number. If there are issues with your filing, PNO staff will give you the transaction number to ensure that corrections and updates are processed appropriately. The assignment of a transaction number, which creates a record of the filing, does not mean that the waiting period has started and is not a substitute for the Waiting Period Letter.

– In 801.30 transactions (such as tender offers or acquisitions from third parties), only the buyer will receive a Waiting Period Letter. 801.30 transactions are by definition non-consensual, and the buyer’s waiting period is confidential under the HSR Rules. After the PNO receives the seller’s 801.30 filing, the PNO will send an acknowledgement letter providing only the transaction number.

– If you need a confirmation that the PNO has received and downloaded your submission before you receive your Waiting Period Letter, use the tracking function of the Accellion FTP platform. You will need to go into your Sent folder in the Accellion FTP application, open the submission, and click on the “Track” button. There is no need to contact the PNO to confirm receipt of the filing.

John Jenkins

March 24, 2021

Officer & Controller Liability: Vice Chancellor Laster Speaks!

One of the great things about the Delaware judiciary is their willingness to weigh-in on important legal issues outside of the courtroom.  That’s sometimes prompted criticism from fragile, sensitive souls like activist hedge funds, for example, but I think the judges commentary provides a real benefit for those who have to intepret sometimes enigmatic Delaware case law in order to help guide clients through their transactions.

Vice Chancellor Laster is one of the jurists who hasn’t been shy about addressing topical issues outside of the courtroom, and in an interview for Berkeley’s Spring Forum on M&A and Corporate Governance, he tackled a couple of issues that everyone has been keeping an eye on – officer liability & controlling stockholder liability.  This excerpt from a Freshfields blog on the event summarizes his comments:

VC Laster explained that, when establishing a damages claim, the ultimate question is not the standard of review, but whether the officer has liability for a breach of his or her duties.  He provided an example of how to state a damages claim against a CEO in a sale of control transaction:  the plaintiff will need to show that (i) there was an action by the officer that fell outside the range of reasonableness (i.e., violated the Revlon standard of review) and (ii) the CEO acted on behalf of the corporation for his own personal interests, with bad faith, or gross negligence.  Not all breaches of fiduciary duty that would be recognized for purposes of injunctive relief will constitute bases for damages claims against officers even though officers are not entitled to exculpation in the same manner as a director.

VC Laster noted further that a critical factor to determine whether a dual director-officer is acting in his or her capacity as an officer (where exculpation is not available), rather than as a director (where exculpation is available), is to look at the non-management directors to see whether they were participating in that same conduct.

The Vice Chancellor then reviewed recent cases addressing when a stockholder has “control” and therefore subjects its transactions with the corporation to the entire fairness standard absent the satisfaction of the MFW safe harbor criteria.  He emphasized that the Delaware courts take a holistic approach and will not be looking at certain stock ownership or voting power thresholds as necessarily determinative. In addition to ownership levels, the role the stockholder plays at the company (i.e., is the stockholder a founder, chair, CEO, or corporate visionary?), indicia of the influence of the stockholder in the boardroom, and the governance regime of the company (such as veto rights).

If you’re interested, the Vice Chancellor’s entire hour-long interview – which covers a number of other issues addressed by the Chancery Court  –  is available on the Forum’s website.

John Jenkins

March 23, 2021

March – April Issue: Deal Lawyers Print Newsletter

The March-April Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:

– Troubling Signs From Recent M&A Case Law: Forgetful Gatekeepers, Targeted Executives, and Poor Record Building

– COVID-19 Deal Terminations: Assessing Specific Performance Provisions

– A Canadian Perspective: The 2021 US and Canadian M&A Landscape

Remember that – as a “thank you” to those that subscribe to both & 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 – 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 will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – 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

March 22, 2021

SPACs: The Captive Insurance Alternative

With SPACs & their directors increasingly being targeted for litigation and the D&O insurance market tightening, this Morgan Lewis memo says that captive insurance may help provide a solution:

Captive insurance is a solution to fill coverage gaps or a means to control insurance terms and conditions. A captive insurer is a wholly owned subsidiary that is licensed to insure the risks of its affiliated companies through the issuance of insurance policies in exchange for the payment of a premium. A specialized actuary retained by the captive typically sets the premium, which is composed of a loss reserve and a risk margin. Captive insurance can be utilized flexibly at any “level” of the insurance tower, or at varying levels dependent on the risk insured.

The memo details some of the economic advantages of captive insurance, including the ability to invest the risk premium and tailor coverage, access to reinsurance markets, and tax benefits.  In addition, if properly structured, the coverage provided by a captive will be “insurance” under Delaware law and not subject to statutory restrictions applicable to rights to indemnification.

John Jenkins

March 19, 2021

Books & Records: Can Inspection Rights be Waived in Delaware?

This Sidley blog notes that recent Delaware case law suggests that entities may limit the right of equity holders to demand inspection of books & records. Whether stockholder inspection rights may be completely waived is an open question, but this excerpt lays out some of the reasons why such a waiver might be possible:

In the corporation context, Delaware courts have recognized waiver as to several rights set forth in the Delaware General Corporation Law, including stockholders’ appraisal rights under Section 262, rights to end a joint venture or seek liquidation under Section 273, or rights to seek a receivership under Section 291. Although we are not yet aware of a decision holding that stockholders validly waived inspection rights under Section 220, the Court of Chancery has recently suggested (without reaching the issue) that there may be strong considerations to support waiver of inspection rights in some circumstances—including “Delaware’s broad recognition of parties’ ability to waive other important rights, whether constitutional or statutory”—and that other recent Delaware precedent “implies that a stockholders’ agreement could waive statutory inspection rights if the waiver was sufficiently clear.”

But the method may be key: though Delaware courts have refused past efforts to limit Section 220 rights through provisions in the corporation’s charter, as the same court noted (again, in dicta), “there are arguments for distinguishing between provisions that appear in those documents and waivers in private agreements.” How Delaware courts will receive those arguments remains to be seen.

While the ability to waive inspection rights remains unresolved, given the surge in books & records demands in recent years and the disruption they cause, the blog suggests that companies may wish to consider including limits on inspection rights in their charter documents or negotiating for contractual limits on inspection rights with at the time of a stockholder’s investment.

John Jenkins

March 18, 2021

Antitrust: NY Legislation Would Mandate Pre-Merger Notification

Can we talk about New York for a minute?  I grew up there, many of my family members still live there, and I think The Empire State has a lot to recommend it – but the state legislature’s fondness for burdensome bureaucratic requirements is head-scratching at times.  The latest area where that tendency has manifested itself is in antitrust regulation. According to this WilmerHale memo, legislation has recently been introduced that would impose a “mini-HSR” pre-merger notification requirement. Here’s an excerpt with the details:

S933 would require companies to notify the New York Attorney General of any transaction that would result in the acquirer holding more than $8 million in assets or voting securities of the target, in the aggregate, if either the acquirer or the target are subject to the jurisdiction of the New York courts. Notice would be required at least 60 days prior to the close of the transaction. This requirement would be the first merger notification provision under state antitrust law in the United States.

For mergers that are reportable to both the FTC and the DOJ under the federal Hart-Scott-Rodino Act (“HSR”) and to New York under the new notice proposal, merging parties would be required to provide their HSR notifications and accompanying materials to the New York Attorney General. Unlike the HSR Act, however, the bill does not impose on the parties any waiting period before they can consummate their transaction beyond the 60-day notice, even if the Attorney General opens an investigation. Still, the 60-day notice requirement could delay some transactions.

Deals reported under the HSR Act that are not subject to an extended “second request” investigation can close after a 30-day initial waiting period (or earlier, if early termination is granted), and the proposed New York statute would capture many deals that are not HSR reportable at all.

Here’s the text of the bill. The legislation contains a number of other provisions, and is generally aimed at “Big Tech,” but the $8 million threshold has the potential to throw a not inconsequential speed bump in the way of a lot of completely innocuous deals. I guess the good news – aside from the fact that it hasn’t become law yet – is that the memo says that the AG would be authorized to issue rules exempting transactions not likely to violate the statute.

John Jenkins

March 17, 2021

Officer Liability: Del. Chancery Again Endorses “Fraud on the Board” Claim

I’ve blogged quite a bit over the past year about the Chancery Court’s unwillingness to dismiss a variety of officer liability claims.  Allegations that officer misconduct in connection with an M&A transaction perpetrated a “fraud on the board” have featured prominently in several of these cases.  Vice Chancellor Laster’s recent decision in In re Columbia Pipeline Group, Inc. Merger Litigation, (Del. Ch.; 3/21) adds another case to that list.

The case arose out of Columbia Pipeline’s sale to TransCanada Corp.  The plaintiffs alleged that the seller’s CEO & CFO breached their fiduciary duties by tilting the playing field in favor of TransCanada, their preferred bidder.  They also alleged that TransCanada aided & abetted the officers’ breach of their fiduciary duty.

The complaint cited a number of examples of alleged misconduct, including TransCanada’s initiation of contact with the CFO in violation of a standstill agreement entered into with potential bidders, the CFO’s failure to inform the board of that contact and subsequent communications concerning that contact with the CEO & the Company’s financial advisor, and the sharing of confidential information with TransCanada – including information about how TransCanada could preempt a sale process – without the board’s approval.

The complaint also alleged that TransCanada again violated the standstill by submitting an offer for the company, that the CFO gave the board misinformation and made material omissions when discussing TransCanada’s bid, that the officers failed to follow the board’s instructions with respect to disclosing the board’s decision to waive standstill agreements with the other bidders, and that they took other actions that favored TransCanada during the bidding process.

Vice Chancellor Laster held that the plaintiffs’ allegations were sufficient to support a claim that the officers breached their fiduciary duty of loyalty. The excerpt from Potter Anderson’s summary of the case explains his reasoning:

The Court held, at the pleading stage, the alleged course of conduct supported a reasonable inference that the sale process failed enhanced Revlon scrutiny as Skaggs and Smith unduly favored TransCanada for improper personal reasons.  The Court cited the January 7 meeting where TransCanada supposedly violated the standstill and Smith allegedly provided confidential information, handed over private talking points, and told TransCanada it was unlikely to face competition.

The Court also pointed to Skaggs’s presentation to the Board that supposedly contained material omissions and misrepresentations as to Company’s value.  The Court also pointed to Skaggs’ and Smith’s purported lack of transparency with the Board, their repeated delays in carrying out Board directives to inform other bidders that their standstills were waived, and their downplaying of Spectra’s interest.  The Court also cited Skaggs’ alleged treatment of TransCanada with exclusivity even when not required and his “serious moral commitment” to TransCanada to only respond to other bidders if they present a “serious written proposal” meaning a “financed bid subject only to confirmatory diligence.”

The Vice Chancellor also upheld the plaintiffs aiding & abetting claims against TransCanada, citing the allegations of multiple violations of the standstill agreement and other circumstances indicating that TransCanada had acted with knowledge of the officers’ fiduciary violations.

This Fried Frank memo provides an in-depth review of the issues raised by the case, and has this to say about the fraud on the board theory:

The decision highlights the court’s recent focus on the “fraud on the board” theory of liability. Under this theory, in connection with a company sale process, a plaintiff can plead a claim against a corporate officer, director or advisor by showing that he or she withheld material information from the directors that would have affected their decision-making or took action that materially and adversely affected the sale process without informing the board. (We note that Vice Chancellor Laster emphasized this theory of liability in the recent Presidio decision as well.)

John Jenkins

March 16, 2021

Intellectual Property Issues in M&A: A Deep Dive

For many companies in technology-related industries, intellectual property rights are fundamental to the value proposition of a proposed acquisition. Even outside of these industries, IP rights are frequently critical to the success of the business and a key aspect of the due diligence and negotiation process.  If you are looking to get your arms around intellectual property issues in M&A transactions, be sure to check out this 106-page guide from Wachtell Lipton.  This excerpt from the intro gives you a sense of the breadth of the guide’s coverage:

This Guide provides an overview of key issues regarding intellectual property rights and technology in M&A transactions, from the way in which intellectual property rights and technology may be defined and transferred or shared in transactions to the challenges that parties face in navigating often complex commercial relationships beyond the closing of the M&A transaction.

Chapter II of this Guide begins with a discussion of the major forms of intellectual property rights likely to be encountered in the M&A process. Special emphasis is placed on the distinction between legal rights themselves and the embodiment of those rights in forms such as documents, software, know-how, hardware and other types of tangible technology.

Chapter III applies the legal and theoretical framework outlined in the previous chapter to issues that arise in the M&A context. This Chapter provides guidance to practitioners on IP issues arising from the signing of a confidentiality agreement to the drafting of definitive transaction documents and closing.

Chapter IV is dedicated to issues arising in the negotiation of the licenses that may be required in carve-out or other private company transactions.

Finally, Chapter V deals with certain additional topics not addressed elsewhere in this Guide, including issues arising in joint ventures and financing transactions.

John Jenkins

March 12, 2021

Private Equity: Navigating Portfolio Company Conflicts

Fund sponsors typically obtain a variety of rights in connection with their investment in a portfolio company.  These include liquidation preferences, director appointment rights, and enhanced voting rights. If the portfolio company experiences financial difficulties or if disputes or other liability issues arise, these rights can create complex conflicts of interest issues for the fund sponsor and its affiliates who may be fiduciaries of the portfolio company.

This Proskauer blog discusses some of the situations in which conflicts may arise and provides some practical advice on how to mitigate their risks.  Here’s an excerpt:

First and foremost, sponsors should ensure that their board designees are sensitized to each of the duties they owe and to whom. While board members may owe duties of loyalty and care to the company, and potentially others, the duties they may owe to the fund and its investors can differ depending on, among other things, how the fund is structured, which jurisdiction’s law applies, and what is provided for (or disclaimed) in each entity’s organizational documents.

Likewise, sponsors and their board designees should be on the lookout for any possible apparent conflict between the interests of the fund and the portfolio company. In cases of potential conflict, fund personnel should consult with counsel and coordinate with the company as necessary to ensure that procedures are implemented to protect against any argument of perceived or actual conflict tainting an otherwise beneficial transaction or board decision.

The blog points out that these protective procedures “may include the formation of a special committee to evaluate a potential transaction, consultation with minority shareholder groups, and obtaining independent valuations.”

John Jenkins