This Perkins Coie memo lays out some of the highlights from the ABA Antitrust Law Section’s spring meeting. One of the topics addressed was the ever-popular issue of defining the appropriate “market” in an any merger analysis. This excerpt discusses the increasing emphasis on “price discrimination markets” in that analysis – and the resulting importance of customer support for the deal:
Recent market definition cases have focused on “price discrimination markets,” which consist of a set of customers who for reasons other than differences in vendor cost, are charged prices different from those charged typical customers. In these cases, the merger parties were vendors to large “national footprint” customers (like hotel and restaurant chains) that purchase goods and services on a centralized basis. Such customers typically prefer dealing with a single vendor who is able to service all of the customer’s units. Because sales to such customers require delivery and service on a national scale, few vendors may be able to compete. Ironically, because the alleged “victims” in such cases are typically power buyers, they already enjoy prices lower than the vendor’s typical customers.
The panelists observed that focusing on price discrimination obscures the real question: whether there are sets of customers, who, because of their purchasing requirements, have fewer vendor options than other customers. The best evidence will be found in the customer’s own purchasing records, which presumably identify the firms that have submitted bids. Second best evidence may consist of the competing vendors’ win/loss bid records. Do they suggest the merging companies are among a very small number of vendors for such national contracts?
In these cases, the extent to which customers complain about a deal plays a big role in the government’s decision about whether to challenge it. Customers may complain on their own initiative or in response to questions from governmental investigators. That reality underscores how essential it is that parties planning a merger “develop a plan for the care and feeding of the parties’ customers.” A big part of that plan is post-announcement outreach out to key customers in order to explain the reasons for the deal and the benefits it will provide customers.
This Weil blog discusses a widely used technique for avoiding the application of widely-used “workaround” for addressing non-assignment clauses in contracts that are part of an asset purchase – and says that recent case law may require the parties to give some more thought to whether it works.
The workaround is undoubtedly familiar to many readers – it involves language in the asset purchase agreement providing that regardless of any other provision, no contract will be assigned if such assignment would be ineffective or breach the contract in question. That language is accompanied by a covenant to the effect that the buyer will be entitled to the benefits and subject to the economic burdens of the contract & that the seller will hold any payments it receives in trust for the buyer & act as its agent until any required consent is received.
But does this work? The blog discusses a recent English case giving a qualified “yes” answer to that question, but also notes that the clause may not work as intended. The problem is that anti-assignment workaround provisions only work because they prevent an assignment of the contract from occurring – and that’s not close to duplicating the effect of an actual assignment:
Anti-assignment workarounds may be important backstops in situations where consents cannot be obtained and a risk assessment as to the likelihood of counterparty blowback is deemed low, but they are hardly a panacea. After all, the key to ensure that the workaround language actually works is to negate any actual assignment having been made to the extent an assignment would violate or be ineffective in the face of a specific anti-assignment clause.
And the workaround language then requires the seller to actually continue to be involved with and assist in delivering the benefits of the contract, with the buyer performing on behalf and as the agent of the seller, any required obligations. Awkward at best and, in some cases, truly problematic if the buyer actually requires any specific action by the seller and the seller is then out of business or has instituted bankruptcy proceedings and is still deemed to be the actual party to the contract.
The blog suggests that parties should place renewed focus on which contracts containing anti-assignment clauses truly can come off the required consent list, and what risks the buyer is assuming as a result of these contracts. In particular, consideration should be given to risks associated with the need for continued involvement of a seller that may have lost interest, or whose involvement may be difficult if not impossible to obtain.
“Sandbagging” in M&A refers to the ability of a party to an acquisition agreement to rely on the other side’s representation even if it knows that the rep is inaccurate when made. In the absence of language in the contract addressing the issue, courts in various jurisdictions have reached different conclusions about whether sandbagging is permissible.
The general consensus – bolstered by comments from Vice Chancellor Laster – has been that Delaware is a pro-sandbagging state. But as this Kirkland & Ellis memo notes, a recent decision from the Delaware Supreme Court has called that position into question:
While not a central element of the decision at hand, both the majority opinion (written by Justice Valihura) and a partial dissent (by Chief Justice Strine) addressed in passing the sandbagging question. In a footnote which acknowledges that the court did not need to decide this issue as the question was not before the court, Justice Valihura wrote: “We acknowledge the debate over whether a party can recover on a breach of warranty claim where the parties know that, at signing, certain of them were not true. [Defendant] argues that reliance is required, but we have not yet resolved this interesting question.”
The memo goes on to point out that in his partial dissent, Chief Justice Strine also raises doubts about Delaware’s view of sandbagging: “Thus, to the extent [Plaintiff] is seeking damages because [Defendant] supposedly made promises that were false, there is doubt that he can then turn around and sue because what he knew to be false remained so. Venerable Delaware law casts doubt on [Plaintiff’s] ability to do so. . .”
Wherever Delaware ultimately lands on the sandbagging question, the best advice is to address the issue head-on in your purchase agreement. That may be the best way to address sandbagging, but it’s still not a particularly common practice – 75% of deals included in a recent Nixon Peabody survey were silent on sandbagging..
Executive compensation can be one of the most sensitive areas to deal with in M&A negotiations. Mark Poerio has come up with this checklist of executive compensation issues that parties should make sure to address early on in the process, before they become deal-breakers. Here’s the intro:
Merger and acquisition transactions will seldom break-apart due to issues related to employee benefit plans and executive compensation. But seriously disruptive issues may arise, and are most likely to explode, when overlooked until the last minute. The table below is intended to facilitate the detection, negotiation, and resolution of possible problems. As a general matter, sellers may defuse risks and streamline negotiations through proactive pre-sale planning. On the other hand, buyers are able to maximize their deal-related protections (and their post-closing alternatives) by assuring early stage attention to the items listed below.
The checklist includes a variety of potentially thorny compensation issues, including key employees with the right to resign with full severance upon a change-in-control, the absence of non-compete arrangements with key employees, and out-of-the-money stock options that can’t be unilaterally cancelled by the seller.
This Ropes & Gray blog says that the IRS is auditing companies that engaged in spin-offs or split-offs with a view to determining whether they impermissibly deducted transaction costs. If you’ve done a Section 355 divisive reorg, this excerpt says that you may want to check out your tax returns to see if you’re likely to be a target:
On March 13, 2018, the IRS announced a new Large Business and International Division (“LB&I”) compliance campaign determined to impose tax adjustments on taxpayers who have deducted the costs associated with a tax-free spin-off, split-off or split-up under Section 355. In general, transaction costs to facilitate section 355 transactions must be capitalized.
The IRS will be examining tax returns of entities reporting section 355 transactions to determine if they attempted to currently deduct transaction expenses. Taxpayers who conducted section 355 transactions in the past few years may want to consider reviewing their return positions to determine if they may be a target of this campaign.
The court distinguished the case from the LAMPERS v. Crawford decision highlighted in our prior blog. Although, like the dissenting shareholders in that case, the Dr. Pepper shareholders also received an extraordinary dividend, they did not relinquish their shares in the transaction. Here’s an excerpt from this Hunton Andrews Kurth memo summarizing the Chancellor’s reasoning:
The Court of Chancery rejected the plaintiffs’ argument that Dr Pepper’s stockholders were entitled to appraisal rights in connection with the transaction. First, the court said that under the Delaware General Corporation Law, appraisal rights are only available to a “constituent corporation” in the merger, which means a party being merged (whether the survivor or non-survivor).
Because Dr Pepper used a reverse triangular merger structure, its merger subsidiary was the “constituent corporation.” Second, the court held that even if Dr Pepper had been a “constituent corporation” to the merger, appraisal rights were still unavailable because Dr Pepper’s stockholders did not relinquish their shares in the transaction.
The memo notes that the decision provides increased certainty to transaction planners regarding how Delaware courts will assess transactions under the relevant merger and appraisal statutes.
If you’ve negotiated contractual drag-along rights with minority shareholders, there’s no reason to worry about the Delaware appraisal statute, right? This recent blog from Steve Hecht & Rich Bodnar says, “not so fast.” Here’s an excerpt:
Venture-backed companies should not assume an implied waiver of minority appraisal rights in a merger that utilizes a voting agreement’s drag-along rights if procedural requirements are not followed. When a waiver of appraisal rights has procedural requirements, they need to be followed or eliminated via an amendment. Alternatively, the drag-along can require minority stockholders to explicitly approve the sale, instead of having the sale be de facto valid without their signatures given the drag-along.
The blog notes that this VentureCaseLaw blog provides a detailed discussion of Delaware case law addressing the procedural issues surrounding the interplay between the appraisal statute & drag-along rights.
In recent years, family offices have increasingly become active direct participants in the market for M&A deals. This Nixon Peabody blog discusses a unique feature of “family offices” that can sometimes give them a leg up on private equity funds – the more long-term nature of the capital they provide. Here’s an excerpt:
Traditional sponsors typically have a four- to seven-year holding period that’s driven by the need to deliver a return within that timeframe to their limited partners. However, family offices are able to invest with substantially longer holding periods because their capital does not face the same kind of expiration date, and their investment goals stretch well beyond the next four to seven years.
Often, sellers will have concerns regarding the long-term legacy of the business, retention of the employees and “slash and burn” approach of compromising long-term growth for short-term gains – even when they don’t have a vested interest in the business after the transaction. It is in these types of situations that “patient capital” can play a key role in alleviating these types of concerns.
The blog says that this is especially true in smaller deals, where the sellers frequently are founders or multi-generation family owners As a result of their personal relationship to the business, these sellers often ascribe a greater value to the “intangibles” involved in a transaction.
Our “Women’s 100” events are governed by the ‘Chatham House’ rule – but Aneliya Crawford of Schulte Roth gave me permission to share this nugget with you. During one of these events, Aneliya was interviewed on the topic of dealing with activists. She represents many of them – and she was asked about why so few women serve as director nominees for activists during a proxy fight.
Aneliya responded that she’s studied this question in depth – and has concluded that the answer isn’t that activists don’t want nor seek women. Rather, the qualified women that they approach only want to serve on the board if the proxy fight settles. In general, they otherwise don’t want to be on a dissident slate and have their name slung through the mud. I don’t blame them. I wouldn’t want that either…