Parties to a merger agreement are prohibited under US and EU antitrust laws from closing a deal that is subject to antitrust review – or taking certain preparatory steps to combine the two businesses – prior to receiving appropriate antitrust clearances. In recent years, EU authorities have taken an increasingly hard line on these “gun jumping” issues, and have imposed substantial fines on a number of companies for violating these restrictions.
This Cleary Gottlieb memo says that a recent decision by the European Court of Justice arising out of a 2013 merger between certain former KPMG affiliates in Denmark & EY provides some additional clarity on the scope of the EU’s prohibitions on gun jumping. At issue in the case was whether the KPMG affiliates’ decision to terminate their cooperation agreement with KPMG shortly after entering into the merger agreement with EY constituted gun jumping. As this excerpt explains, the ECJ concluded that it did not:
The ECJ held that KPMG DK had not violated the standstill obligation in Article 7(1) EUMR by giving notice to terminate the cooperation agreement. The ECJ recalled that the standstill obligation only applies to the implementation or closing of “concentrations” as defined in Article 3 EUMR. According to this provision, a concentration arises as a result of a “change of control on a lasting basis” resulting from a merger or acquisition by actions that either separately or together “confer the possibility of exercising decisive influence on an undertaking.”
On this basis, the ECJ held that steps taken by merging parties to implement or close a transaction before clearance will only amount to gun jumping if such steps can be viewed as “contributing to a lasting change in control of the target undertaking.”
The ECJ concluded that KPMG DK’s termination of its cooperation agreement did not result in a “concentration,” because that action itself did not confer upon EY any possibility of exercising control over KPMG DK, which was independent of EY both before and after taking that action.
The memo notes that the ECJ’s action confirms that merging parties can take certain preparatory steps in advance of a closing without running afoul of EU regulations, but that the test remains somewhat vague as to what actions might be permissible. In light of he recent enforcement trend, the memo cautions that the room for interpretation that this vague standard implies may be applied in a broad manner by the European Commission.
Integration is the most challenging part of a deal, and this PwC blog says that companies that are good at it share one thing in common – they move fast. Here’s the intro:
When integrating a deal, speed clearly makes a difference. There is little value in a prolonged transition. Many companies have underperformed on the justified price and expectations set for the deal. Disappointing operating results and returns that rarely exceed the cost of capital are common. Numerous academic studies have found that most acquisitions destroy, rather than create, shareholder value. Many companies fail to recapture pre-acquisition performance levels despite valiant efforts to increase revenue, reduce expenses, and divest underperforming assets.
Execution is critical. Deals seldom fail because they are strategically invalid. Rather, failure is commonly a result of poor integration execution. In today’s world of sophisticated strategic and financial buyers, justifying the premiums needed to successfully close a deal depends on swiftly and efficiently capturing deal synergies. Speed is vital. So is focus on decisive objectives – actions that can quickly create shareholder value.
One interesting statistic that the blog points out is that companies are getting their integration teams involved in the M&A process earlier than in the past. For example, in 2013, only 21% of integration teams were involved during deal screening – by 2016, that percentage rose to almost 32%.
Despite a significant increase in the number of HSR filings last year, this Perkins Coie memo says that the DOJ & FTC’s HSR Annual Report reveals that Second Requests & deal challenges declined. This excerpt runs through the numbers:
In fiscal 2017, a total of 2,052 transactions were reported under the HSR Act, which is a 12% increase over the 1,832 transactions reported in fiscal 2016. In 2017, the FTC and the DOJ investigated about 14% of reported transactions in which a Second Request could be issued, a 3.5% increase from those investigated in fiscal 2016. Of the transactions investigated, just 18% resulted in the issuance of Second Requests, a nearly 19% decrease from the 23% reported in fiscal 2016.
Where Second Requests were issued, there was also a decrease in the number of transactions which resulted in an abandoned or restructured deal, a consent decree requiring the parties to divest assets, or litigation in federal district court, just 77% in fiscal 2017 compared to 87% in 2016.
So what’s been the experience this year? According to this Dechert memo, the number of significant merger investigations so far are on track to match last year, with 13 investigations so far this year resulting in a consent decree, closing statement, lawsuit or an abandoned deal, compared with 12 during the first half of 2017.
Francis Pileggi recently blogged about the Chancery Court’s decision in ChyronHego v. Wight, (Del. Ch.; 7/18), in which Vice Chancellor Glasscock laid out a roadmap for drafters on how to draft enforceable reliance disclaimers in acquisition agreements. Here’s an excerpt with some of the key takeaways:
– Delaware law allows parties to identify the specific information on which a party has relied, and forecloses reliance on other information.
– In order for an anti-reliance provision to be effective, it must be unequivocally clear. By contrast, “Standard Integration Clauses” without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations.
– The court emphasized that in order for anti-reliance language to be enforceable, “the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” See footnote 55 and accompanying text.
– Delaware courts will not condone an anti-reliance provision that one attempts to use in order to: (1) protect a seller from liability for making false representations in a contract; or (2) avoid liability for knowledge that representations in a contract are false.
Also check out this recent blog from Weil’s Glenn West, which discusses ChyronHego & other recent Delaware case law and takes a deep dive into the actions that parties to a contract should take to ensure an enforceable anti-reliance provision.
I’m a really bad golfer, so on the rare occasions when I do play, I’m always glad when my partner’s willing to give me a “mulligan.” I’ll exercise my right to remain silent when it comes to my skills as a lawyer – but I was glad to see that the Delaware Chancery Court recently signed off on a mulligan for the defendants in Almond v. Glenhill Advisors (Del. Ch. 8/18).
In that case, the Court rejected the plaintiffs’ efforts to unwind a merger due to a defective pre-deal stock split. Instead, it held that the buyer’s actions to ratify defective corporate acts under the procedure established in Section 204 and 205 of the DGCL after the closing were sufficient to cure the defects.
Among other things, the plaintiffs alleged that too much time had elapsed since the defective acts to permit use of the statutory ratification procedure – and that the act therefore should not be viewed as a “failure of authorization” within the meaning of the statute. The Chancery Court rejected that out-of-hand:
The plain language of Section 205 does not contain a temporal limitation on the court’s power to validate defective corporate acts, nor would such a limitation make sense where, as here, the effect of a defective corporate act may not manifest itself until years into the future. As noted previously, our Supreme Court has emphasized the need to “read broadly” the term “failure of authorization” to “cure inequities” and “to address any technical defect that would compromise the validity of a corporate action.
Given the highly technical nature of the defect & the Court’s conclusion that “the equities overwhelmingly support correcting this obviously unintended defect,” it concluded that the buyer’s actions were sufficient to ratify the pre-merger defective actions under Delaware law.
Investor relations firm Westwicke Partners recently blogged advice for buyers on how to communicate with Wall Street about an acquisition. Here’s an excerpt addressing some of the key points to address in communications with the Street:
– Deal Terms. These are the transaction’s high-level financial points. How much did you pay, what was the structure of the deal (cash vs. stock vs. cash and stock), how did you finance the deal, etc. This allows the Street to assess the deal’s impact on your current financial profile and frame the rest of its analysis.
– Strategic Rationale. This allows you to answer the question on everyone’s mind: Why did you make this acquisition? Does it grow your top line, does it accelerate your path to profitability, does it expand your addressable market, does it fill a hole in your product or service offering, are there synergies?
– Overview of the Acquired Business & Market Opportunity. Think of this as your opportunity to introduce the company and provide a framework for how to model the new business. What does the company do, how does or will it generate revenues, what is its growth rate, what is its total addressable market, and, if applicable, what is its financial profile?
– Introduce New Co. Building on the other information you’ve just provided, you now need to show what the post-acquisition company looks like, clearly outlining any aspect of your story that has changed. What does the revenue growth rate look like now, how will the acquisition affect your gross margins, and how does this impact your bottom line? Analysts and investors will want to know your outlook post deal.
The blog notes that announcing a new deal often provides an opportunity to reset Wall Street’s expectations for the business, so buyers should pay careful attention to the guidance provided, as it will be used as a benchmark to assess the buyer’s capabilities when it comes to both M&A and making good use of capital.
This recent blog from Weil’s Glenn West discusses the importance of distinguishing between “expert determinations” and “arbitrations” when it comes to addressing post-closing purchase price adjustments. . Here’s an excerpt summarizing the differences between the two mechanisms:
The powers granted to an arbitrator are “analogous to the powers of a judge.” In an arbitration, “[a]rbitrators are expected to rule on issues of law, make binding interpretations of contracts, resolve disputed issues of fact, determine liability, and award damages or other forms of relief.” And pursuant to the Federal Arbitration Act, an arbitrator’s award is enforceable by a court and there are very limited rights to appeal or review that award.
An expert determination, on the other hand, is not a quasi-judicial proceeding at all, but instead is simply an informal determination by an expert of a specific factual issue that a contract requires to be so determined by the designated expert. One must still utilize the courts to enforce that determination as part of a broader breach of contract action. But courts typically do so if the contract so provides. And, unlike an arbitration, the contract can also establish the court’s standard of review, such as “the expert’s determination shall be binding on all parties, except in the case of manifest error.”
The blog notes that Vice Chancellor Laster’s recent decision in Penton Business Media Holdings, LLC v. Informa PLC, (Del. Ch.; 7/18) demonstrates that Delaware courts distinguish between arbitrations and expert determinations as long as the parties make that intent clear in their contract. The blog cautions that because of the significant differences between the two approaches, “deal professionals and their counsel should be cautious in clearly describing the third-party dispute resolution process they are contemplating for any post-closing purchase price adjustments.”
After issuing a second request as part of the HSR review process, antitrust regulators often seek a “timing agreement” addressing key timing and logistical issues arising in the merger investigation. In a recent blog, the FTC announced that it had adopted a new Model Timing Agreement. This excerpt describes the purpose of these agreements:
Merger investigations commonly involve timing agreements, which—among other things—provide an agreed-upon framework for the timing of certain steps in the investigation. Timing agreements also ensure that FTC staff has notice of parties’ plans to consummate the transaction. Both parties and staff benefit from having such a framework established shortly after issuance of the Request for Additional Information and Documentary Material, also known as a Second Request, as it allows staff and the parties to engage efficiently in a substantive exchange without undue uncertainty during the Second Request review period.
The blog summarizes the key provisions of the Model Timing Agreement, and notes that the FTC expects that future timing agreements will conform, or substantially conform, to this Model.
The legality of arrangements with finders & unregistered brokers is a murky and complex area. Fortunately, this Venable memo provides a nice overview of the legal issues and the parameters of available exemptions. This excerpt provides an overview of some of the potential pitfalls of being classified as a unregistered broker under the federal securities laws:
The distinction between a finder and a broker-dealer as classified by the Securities and Exchange Commission can have significant consequences. An unregistered broker-dealer may face sanctions from the SEC, and it may be unable to enforce payment for its services. In addition, transactions involving an unregistered broker-dealer may create a right of rescission in favor of the investors, allowing the investors the right to require the issuer to return the money invested.
One example of the consequences of an unregistered broker-dealer occurred in the Ranieri Partners SEC enforcement action. In that action the SEC brought charges against a private-equity firm, its managing director, and a consultant because of the consultant’s failure to register as a broker-dealer. The SEC’s order found that the private equity firm paid transaction-based fees to a consultant, who was not registered as a broker-dealer, for soliciting investors for private fund investments.
The memo reviews the SEC’s guidance on the difference between “finders” and “brokers,” discusses federal and state securities law provisions relating to “M&A brokers,” reviews FINRA guidance and its regulatory relief for “Capital Acquisition Brokers,” and also addresses issues under the JOBS Act.