My apologies to Jello Biafra & “The Dead Kennedys”, but that song was the first thing that popped into my head when I read this excerpt from Keith Bishop’s recent blog:
Suppose Mr. Henry owns all of the outstanding shares of a Virginia corporation that owns all of the issued and outstanding shares of a Massachusetts corporation that owns, among other things, real property in Los Angeles, California. Suppose further that Mr. Henry sells his shares in the Virginia corporation to a buyer in New York and that the transaction is negotiated and closed in New York. Does anyone believe that the County of Los Angeles can impose a documentary transfer tax on the transaction?
In an alarming decision yesterday, the California Supreme Court held that the County of Los Angeles could impose a documentary transfer tax on a written instrument that transferred beneficial ownership of real property from one person to two others. 926 N. Ardmore Ave. v. County of L.A., 2017 Cal. LEXIS 4768 (Cal. 2017).
Big states sometimes flex their tax muscle in odd ways – and applying a county excise tax on real estate transfers to a deal like this certainly qualifies as odd. I don’t know how much of a taste LA wants here, but it will be interesting to see if somebody tries to come up with a workaround.
People sometimes go to great lengths to dodge the tax man when it comes to deals. For instance, when I was a young lawyer, I remember hearing stories about lawyers getting up in the middle of IPO closings & cabbing it over to New Jersey for the formal issuance of the shares in an attempt to avoid application of New York’s stock transfer tax.
Anyway, for now at least, it looks like the lyrics to “California Uber Alles” need to be changed – instead of “mellow out or you will pay,” it probably should be “mellow out AND you will pay.”
Update – Keith Bishop shared the following information on the potential amount of this tax: “The county’s “taste” can be significant. The tax is based on the value of the property. Value is determined exclusive of the value of any lien or encumbrance remaining thereon at the time of sale. This would allow the exclusion of mortgage debt assumed by the buyer, but not new secured debt obtained by the buyer in connection with the purchase.
In Los Angeles County, the rate is $.55 per $500, with no cap. If, for example, if the property is valued at $10,000,000, the amount of the County’s Documentary Tax would be calculated by dividing $10,000,000 by $500, and multiplying that number by $0.55 for a total of $11,000. Some cities impose an additional amount per $1,000 as well. Since California real estate isn’t cheap, the amount of the tax can be significant.”
This book chapter by Vice Chancellor Laster addresses the remarkable evolution in Delaware’s M&A jurisprudence over the past three decades. Here’s the abstract:
In the decades since 1985, the Delaware Supreme Court’s attitudes towards recurring third-party M&A scenarios have evolved significantly. Four areas that stand out are (i) the level of comfort with management-led, single-bidder processes, (ii) the legitimacy of defensive measures that appear designed to deter the emergence of alternative bids, (iii) the relative priority of fiduciary duties and third-party contract rights, and (iv) deference to stockholder voting. Current doctrine is much more favorable towards sell-side boards and the contract rights of third-parties.
Although many factors have contributed, the two predominant reasons for these shifts are (i) the rise of sophisticated institutional investors who have the ability to influence the direction of the corporations in which they invest and determine the outcome of M&A events, and (ii) the system-wide failure of stockholder-led M&A litigation to generate meaningful benefits for investors, setting aside occasional recoveries by a small subset of the bar.
After 30 years of evolution, are we close to a point of stasis in Delaware? In light of the rapid changes that have happened since Corwin & MFW were decided, it’s hard to say – my guess is that Delaware’s world is going to keep on spinning for a while.
Here’s a Norton Rose Fulbright blog that talks about some of the unique aspects of negotiating an acquisition of a small, private company – including the fact that for many sellers, it’s not just a business deal. This excerpt addresses the importance of keeping the seller’s perspective in mind during negotiations:
While the more seasoned buyer could be approaching the deal from a purely business perspective, the seller’s sentimentality towards its company, and its lack of experience in M&A deals, provides the seller with a different perspective—one that is less purely business, and more personal and emotional. Perhaps the seller truly views its employees as family, and wants to ensure that they will be treated well. Or maybe the seller wants a guarantee that it will be able to keep its office, wine or art collection, or company car post-closing.
These may not seem like big issues to a sophisticated buyer, but they can be very important to the seller. Efforts to address issue like these often won’t cost much, but can help the seller to feel that it has extracted important items of value during the negotiation process.
Here’s an excerpt from a recent Nixon Peabody blog with observations on the impact that rep & warranty insurance has had on the size and terms of escrow arrangements in private equity deals:
In our experience, Rep and Warranty Insurance has impacted escrow percentages in Private Equity transactions. In deals that involve a Private Equity seller, historically we would have expected to see anywhere from 8% – 10% of the total purchase price escrowed for indemnification purposes. However, with the use of Rep and Warranty Insurance, we now see that escrow percentage routinely decreased to approximately 1% of the purchase price, which is escrowed to provide for payment of the Rep and Warranty Insurance deductible.
Some private equity deals have eliminated the indemnification escrow altogether – and are just using an escrow for purchase price adjustments. In addition, special escrows have been established in some transactions to address items excluded from coverage.
The blog says that the rep & warranty insurance tidal wave hasn’t swept strategic buyers yet. Escrow arrangements in these deals still contemplate holdbacks in the traditional range of between 8% – 10% of the purchase price.
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This Shearman & Sterling blog discusses Vice Chancellor Laster’s recent bench ruling in In re Good Tech Corp. Stockholders Litigation (Del. Ch.; 5/17), where the Vice Chancellor permitted claims against a company’s financial advisor to be severed from settled claims against the other defendants – despite provisions in the bank’s engagement letter designed to prevent that. Here’s an excerpt:
The financial advisor opposed the severance and sought a continuance of the trial, arguing that the settlement contravened the settlement consent and indemnification provisions in its engagement letter with Good—drafted in the wake of In re Rural Metro Corp., 88 A.3d 54 (Del. Ch. 2014)—intended to protect against just such an eventuality.
Noting that neither plaintiffs nor the settling defendants were parties to the engagement letter, and concluding that the advisor could recover money damages were it subsequently determined that the provisions were breached, Vice Chancellor Laster granted the severance request, denied the continuance request, and ordered the claims against the financial advisor to proceed to trial as previously scheduled.
Investment banks are deep pockets, and the prospect of their clients settling out & leaving them holding the bag as the sole remaining defendant has long been an area of concern to them. That concern was heightened by the staggering damage award in Rural Metro. As a result, increased attention has been paid to engagement letter language limiting the ability of other parties to settle without the bank’s consent. But those contractual protections may not be much help if the other defendants aren’t parties to the contract.
In Chicago Bridge & Iron v. Westinghouse(Del. Sup.; 6/17) the Delaware Supreme Court reversed the Chancery Court’s earlier decision holding that post-closing adjustment claims were subject to mandatory arbitration under the terms of the agreement. That’s the narrow holding in the case – but it’s about a lot more than whether a post-closing adjustment was subject to arbitration.
First of all, the stakes in this case were enormous – the working capital true up in the Chicago Bridge agreement called for the purchase price to be adjusted based upon the difference between closing net working capital and target net working capital amount. The seller’s calculations would have resulted in a $428 million payment from the buyer. The buyer’s true-up calculations – which were premised on its quarrel with the seller’s historical compliance with GAAP – would have resulted in a $2.15 billion payment from the seller to the buyer. Since that claim was cast as merely being part of the true-up, its outcome would have been summarily decided by an independent accountant.
From the Supreme Court’s perspective, the case was really about whether a fairly standard working capital true up provision could be used as a “can opener” to permit the buyer to avoid contractual limitations on liability through a challenge to the seller’s historic accounting practices.
The Court said that the answer to that question was “no.” It said that in concluding otherwise, the Chancery Court had given short-shrift to how the true up fit in to the structure of the purchase agreement – which had, in other places, provided that the seller would have no liability in damages to the buyer. Here’s an excerpt summarizing the Court’s position:
By reading the True Up as unlimited in scope and as allowing Westinghouse to challenge the historical accounting practices used in the represented financials,the Court of Chancery rendered meaningless the Purchase Agreement’s Liability Bar. The Court of Chancery also slighted the requirement in the text of the Purchase Agreement that Westinghouse indemnify Chicago Bridge for a broad set of claims related to Stone. Not only that, it then subjected Chicago Bridge to unlimited post-closing liability by way of an expedited proceeding before an accounting expert who was charged with delivering a rapid decision based solely on written submissions of the parties.
The Court also observed that the reason parties sign-up for this type of dispute resolution method when it comes to working capital adjustments is that the arbitrator is focusing on a “confined period of time between signing and closing using the same accounting principles that. . . formed the foundation for the parties’ agreement to sign up and close the transaction.”
This blog from Stinson Leonard Street’s Steve Quinlivan has some additional insights into the Court’s opinion.
When a big deal’s brewing in your industry, it’s not unusual for other competitors to receive inquiries from antitrust regulators concerning the market impact of the potential deal. Those inquiries sometimes turn into 3rd party subpoenas – and big headaches for the companies on the receiving end of them.
This Wilson Sonsini memo reviews Humana’s recent unsuccessful efforts to curb extensive discovery requests made by the FTC as part of its Walgreens/RiteAid investigation, and offers tips for companies in similar situations to effectively negotiate with regulators to lessen the burden. Here’s an excerpt:
Be Prepared. Work with counsel to identify employees and shared files likely to have information covered by the subpoena. Having this information (and knowing what you do not have) at the outset can facilitate productive engagement with the antitrust agency.
Ask Questions About the Requests. Requests often appear to be duplicative, and engaging with the agency on their reasoning for specific requests may lend insight into additional ways the request can be narrowed or focused.
Offer a Counter Proposal. Once engaged in discussions with the agency, be proactive in identifying ways in which the subpoena that could be modified and/or reduced.
Specify the Burden. Be exact in describing the scope of the subpoena’s burden by specifying the number of employees’ records that would be impacted, whether any of the information requested is held in file storage, the volume of documents that would need to be collected, and the cost of reviewing the files.
While each investigation has its own unique circumstances, preparation & early discussions with the agency can help reduce the burden of 3rd party subpoenas and other discovery requests in antitrust investigations.
In a recent blog, Steve Quinlivan flagged a new Delaware Supreme Court decision in which Chief Justice Strine affirmed a Chancery Court’s decision to dismiss fiduciary duty & disclosure claims – but said that some additional disclosure would’ve made everybody’s life a little easier:
We affirm, although we note one troubling aspect of the record. The plaintiff’s complaint pointed out the failure of the target to the merger to disclose that the chairman of its special committee was considering joining the special committee’s outside counsel as a partner. That fact was disclosed within weeks after the merger’s closing by the law firm in a hiring announcement.
Although we, like the Court of Chancery, conclude that this fact was not material, one can understand why it caught the attention of the plaintiff, and prudence would seem to have counseled for bringing it to light earlier, especially given that the chairman’s intention to become a partner at that firm was going to become public in any event.
Although the information may not have been material, it had the potential to raise eyebrows – and thus gave the plaintiff something to throw against the wall in the hope that it might stick. As the Chief Justice observed, not disclosing the chairman’s decision to join the firm “raised needless questions, in a high-salience context in which both cynicism and costs tend to run high anyway.” Disclosing the chairman’s new affiliation before the votes were counted would have taken those issues off the table.
